According to a study conducted by the National Center for Family & Marriage Research at Bowling Green University, one in four divorces in 2009 occurred to persons ages 50 and older. This amount is double what it was in 1990 and, due to an aging population in the United States, is only likely to increase over time.
Divorce at an older age is typically more difficult than for younger people when it comes to recovering one's financial health. Spouses going through a divorce over the age of 50 are likely to have significant decisions to make on how to split their assets and restructure their retirement plan, as well as when it comes to issues involving the payment of alimony and child support. The stakes are often greater because the assets tend to be larger for gray divorcees, and the consequences of a wrong decision are far graver simply because the clock is ticking and there is not as much time to make up for any bad decisions.
So what should someone who is over 50 and going through a divorce be aware of both during the divorce proceedings and after the divorce is final to help them transition smoothly into the next stage of their lives?
Splitting the Assets
One of the most crucial decisions made during the divorce proceedings concerns the splitting of the assets once the divorce is final. In determining how much each spouse takes from the marriage, most states follow the principle of Equitable Distribution. While assets are not necessarily split 50/50, the amount awarded to each spouse is based on what is "equitable" given such factors as the length of the marriage, the ages of the spouses, and the income and earning potential of each spouse, in addition to other factors.
Once "equitable" is determined, how do you choose which assets should comprise your share? Careful consideration needs to be given to what the cash needs will be once the divorce is finalized. For example, a 51-year-old soon-to-be-divorced spouse who will need to withdraw money from an investment account to supplement her lifestyle after the divorce will probably want to ask for assets that are liquid, that is readily convertible to cash, and tax efficient (non-retirement account assets). A mistake made here in selecting to receive the marital home instead of liquid assets may quickly result in the need to sell the home and downsize. Likewise, taking the retirement accounts instead of non-retirement accounts would result in having to pay taxes each time a distribution was taken from the retirement account. If $50,000 was needed annually, then $70,000 may need to be withdrawn to net down to $50,000 after taxes. The retirement account is then likely to be drawn down faster, running the risk that the spouse will run out of money.
Assets should be selected only after a thorough evaluation is made of how much income is needed and for how long. The tax efficiency of the assets selected is also an important factor to review when selecting assets.
Changing Beneficiary Designations
One of the most common mistakes made once the divorce is final is forgetting to remove a former spouse's name as the beneficiary on retirement accounts and life insurance policies. Many also forget to remove their former spouse's name on their financial powers of attorney, health care proxies and Living Wills. This can be disastrous as not making these changes can result in the former spouse inheriting assets they should not be receiving or being asked to make financial or medical decisions that should be made by others. This seems to be more likely to occur with older people, who may have been married 25, 30, or more years.
The change in beneficiary should be done as soon as possible with the ex-spouse's name being removed (unless for some reason the divorce agreement calls for the spouse to continue to be named as a beneficiary). New powers of attorney and health care proxies should be drawn up immediately naming others to these very powerful roles.
Managing the Finances
Many long-term marriages consist of one spouse handling most if not all of the finances of the household, while the other spouse may handle other household chores. For an older spouse who is not used to handling the finances, this can be a daunting task at this stage in their life. In these cases, it is best to begin by requesting a copy of your credit report from the three credit reporting agencies. These reports can alert you to issues of identity theft or fraud as well as any mistakes that may have been made. Items of concern should be reported back to the credit reporting agencies for further review.
Once this is done, then you can move on to learning how to balance your check book or pay bills online, and then ultimately to investing your assets.
Howard Hook is a CPA and Certified Financial Planner with the wealth management firm of EKS Associates in Princeton, NJ.