Key Issues in Gray Divorce
Gray divorce rates (meaning divorce when parties are over 50 years of age) have surged 60 percent in the past 10 years, while divorce rates overall have declined. Critical to any divorce is the cash flow post-divorce, financial security post-divorce and the ability to recover. Unfortunately, the timing of gray divorce and its proximity to one’s “golden years” creates a panoply of critical considerations to effectuate a proper settlement.
it is imperative to discuss these key factors because of the timing of divorce. This is when the “older generation” needs to consider timing of taking retirement benefits such as pensions, Social Security, and government regulated Medicare, as well as mandatory required minimum distributions from retirement accounts, the reality of young workforces, the ability to retrain, the health issues since it is more likely that “engine light will go on in your 50s” Other personal planning considerations include care planning even if not needed at this time since it is more common for adult children with their own families to live distantly from their parents for their jobs.
If Social Security is taken before Full Retirement Age, there is a huge haircut of 30% that will be permanent throughout the entire period it is received. It is usually recommended that Social Security recipients plan their liquidity and cash flow until they are able to take their Social Security at Full Retirement Age or later. If a couple is married, planning is easier and typically more lucrative. One spouse can claim benefits earlier and then when the other with the larger benefit reaches FRA, at which time the spouse can disclaim their own benefit and take 50% of the spouses.
Better yet, the spouse with the higher social security can defer until age 70 and earn an 8 percent increase in the permanent monthly amount EACH year from 67 (or FRA) till age 70. This is a significant benefit to remaining married at retirement.
Gray divorce couples need to rely on either their own Social Security benefit or 50 percent of their spouse’s if they were married 10 or more years, divorced for 2 years before claiming, and are not remarried before age 62. These stipulations and requirements are highly significant in the divorce financial planning process as factors in the future cash flow analysis, potential support needed, and ability to be financially stable post-divorce.
The elephant in most divorce rooms at this age is the provision for covering healthcare premiums. Oftentimes, if one spouse has not been in the workforce, it will be difficult to re-enter during these golden years especially into positions that provide healthcare benefits. Statutes in all the states do not require any provider or spousal support payor to pay for health insurance (although the expense could be indirectly covered as part of the living expense factor in determining the amount and duration of spousal support).
The healthcare expense is significant if purchased individually since the marketplace premiums include the cost of what the employer would typically pay plus the individual’s premium portion. While the other non-employed party may participate in the same medical plan as the employee through COBRA, the cost is as prohibitive or more than the individual plans since the non-employee divorcee is paying both the employer and employee premiums. Should COBRA be desired, there is a small window of 60 days to notify the employer or the non-employee risks not getting an opportunity to purchase COBRA at all. Medicare cannot begin until age 65 and Medicaid has very stringent qualification requirements.
The employer provided retirement plan offerings such as 401(k), 403(b) and 457(a) plans governed by ERISA are also another topic of prime importance to the gray divorce parties. The plan documents supersede any Marital Settlement Agreements. How the plans operate (allowing for cash withdrawals now, repeatedly or not) affect the settlement discussions because of the potential need for a lump sum of cash during these years leading up to Full Retirement Age and Medicare. The plans rule NOT the settlement agreement requiring a solid understanding of what the plan will allow.
Securing lifetime payments from pension benefits is likely the least understood of all assets in divorce settlements. This guarantee is incomparable to defined contribution plans (e.g.401(k)_distributions since it obviates the market fluctuation, investment strategies needed and the possibility of “running out of funds.” While pensions are infrequent today, there are many holdovers for the current crop of gray divorces who were in the workforce when pension plans were prominent. These are not one-for-one similar retirements that can be easily offset against defined contribution plans. While in some cases it makes sense to offset, the analysis should be given heightened attention depending upon the longevity factors, risk tolerance, and other key considerations for the gray divorcee. In this discussion is the consideration of the beneficiary/survivor benefit election. Pensions are fraught with many nuances and requirements, some pension plans requiring legal Joinder to the divorce.
Finally, cash value of the assets are high stakes in ensuring equitable settlements. Calculating net present value and consider income from ALL sources for each party are imperative tasks when determining the appropriate support levels (if any) and for ensuring positive cash flow and investments that can be liquidated as needed during the golden years.
In these instances, reverse mortgages, annuities and other instruments that are not commonly used for most retirees may be advantageous to the gray divorce party.
It is very important for those involved in gray divorce to seek as much consult and advice as possible regarding the relevant factors that will can enable a smooth transition post-divorce and avoid ruinous financial hardship if not well planned and negotiated.
This article does NOT constitute legal advice and is for general information purposes ONLY. Prior to making any decisions, seek legal counsel from a licensed attorney.
