Gray Divorce: Safe Withdrawal Rates
When you divorce in your 50s or older, one of the most important concerns is the cash flow that can be expected to support the marital lifestyle. Often, spouses may be concerned about the stability of their job given that ageism, downsizing, and artificial intelligence are impactful on companies’ budgets.
This makes the liquidity situation post-divorce more concerning. Many parties have their funds in retirement accounts, real estate, or low-cost-basis stocks that will cause a tax impact upon selling for necessary living expenses.
And then there is the cost of healthcare after losing employment or after divorce and no longer having coverage from the employed spouse in a one-wage-earner marriage. Medicare does not start until age 65. Affordable Care Act exchange insurances are pricey as well as individual policies if the maximum threshold of income is exceeded and a party does not qualify for subsidies.
Even lump sum spousal support payments are tricky to manage because of the need for a relatively low-risk allocation to protect the principal and generate enough income to support a given lifestyle.
Most importantly, expenses need to be reviewed and categorized as non-discretionary and discretionary. This is a critical step that should not be overlooked. Even the non-discretionary expenses need to be reconsidered in terms of, for example, the affordability of the marital home. Potential reconsiderations include relocation to a lower cost of living state or area, purchase of a house with lower property taxes, lowering the amount of the mortgage by downsizing or evaluating the cost/benefits of renting instead of owning.
Because cash flow will likely need to be augmented even with any spousal support, the question is how much is a safe withdrawal from retirement funds if the funds are potentially required to last 30-40 years. This is a very long amount of time and while it appears that with a 5% real rate of return on the account, the money will last throughout retirement that is not always feasible due to the risks as described below may severely impact the savings and diminish the returns.
With a 5% real rate of return, principal is preserved. However, if the 4% is exceeded because of unforeseen healthcare or other bills in any given year, this will eat away at principal.
If there is a bear market (usually takes 2 years to recover), then the principal will be automatically depleted for two or more years, and if extended, may never quite recover.’
One of the biggest impacts on retirement funding is inflation. It varies for goods and services, with healthcare inflation among the highest at 8%. Inflation can have a significant impact on the sustainability of funds throughout retirement.
While the typical rule of thumb is 4% of the value of the account annually, it may need to be lowered depending on inflation, the age at first withdrawals, market performance, sequence of returns risks, portfolio allocation and other factors. If the 4% withdrawal was in place, and the aggregate balance of retirement accounts is $1,000, the amount that can be withdrawn after age 59.5 without penalty is $40,000 annually.
Thus, caution needs to be taken, annually, to assess the amount that can be withdrawn and the timing of that withdrawal. If market conditions are down, that means that selling positions at lower values will generate less income than needed. There is a higher probability of having to tap into principal as well to meet living expenses.
It is highly encouraged that even if a spouse has been out of the workforce for many years, that there is supplemental wage income and continued retirement funding at least until full retirement age (current age 67 for those born after 1959). While many intend to continue to work after “retirement” (assuming age 65), the opportunities to be rehired as one ages is less than 37% according to a recent 2026 study. Best efforts should be made to increase the top line (income) the 50s and early 60s when health and other issues are less of an impediment to employment. Once a person is no longer in the workforce, the opportunity to re-enter is less probable.
During divorce negotiations, these factors should be considered as long-range planning for financial security in pre-retirement and retirement years especially with grey divorces.
This article does NOT constitute tax or legal advice and is for general information purposes ONLY. Prior to making any decisions, seek legal counsel from a licensed attorney and CPA.
