Divorce Financial Literacy

Gray Divorce: Mistakes to Avoid When Divorcing Over 50

BY Leslie Thompson | CFA®, CPA, CDFA™, Chief Investment Officer, Co-Founder | Jul 26, 2021

Growing old is hard enough, and going through a divorce when you’re older doesn’t make things easier.  Gray Divorce, or divorcing when you’re over 50 years old, is more common now than ever before. 

Approximately one in four marriages end when one or both spouses are over 50.  Why the surge in breakups?  As people age, they grow – and grow apart.  Many marriages dissolve once children grow up and move out of the family home.  More women are working and becoming financially independent.  Some women out-earn their spouses, so there are no longer financial reasons to stay together.

Gray Divorce can be financially and emotionally devastating.  The cost of living is considerably higher when you’re single than when you’re sharing expenses with a spouse.  A divorce later in life can devastate retirement plans — there is less time to weather stock market fluctuations, pay off debt, and recoup financial losses.  Some are reaching the end of their peak earning years, so there is less chance to make up for financial shortcomings before retirement.

In addition to the financial impacts after divorce, you could also incur hefty financial responsibilities while going through a divorce, from legal fees and therapy bills to paying all of the bills independently.  Here are the twelve most common divorce mistakes that people over 50 make.

#1 Failing to Create an Inventory of Assets

More often than not, one partner better understands the couple’s finances than the other.  This person likely has an excellent idea of how much money is in their savings account(s), how much money their investment accounts hold, and the value of the couple’s assets.  If you’re the latter, you’ll want to take an inventory of all of the assets in your marriage before you attempt to split them up.  In addition to knowing what’s in the bank, it’s also imperative to keep track of your retirement accounts and any life insurance policies you may have.

#2 Keeping the House

If you end up being awarded the family home, think long and hard about keeping it or selling it.  Your home may be your sanctuary, but it can also be a money pit.  If there are children involved, it may seem less disruptive to stay in the home, but consider other important factors.  You’ll need to figure out if you can afford the mortgage, and keep in mind you’ll be the only one paying for upkeep, property taxes, emergency repairs, and any other costs associated with maintaining the property.  Property value fluctuates, so don’t assume you’ll be able to sell your house for the amount you need in the event money (or lack thereof) becomes an issue.

#3 No Knowledge of What You Owe

Joint debts can come back to bite you.  There are nine states with community property laws – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.  Community property essentially boils down to being held responsible for half of your spouse’s debt, even if the debt isn’t in your name.  Like Indiana or other non-community property states, you may be liable for jointly held credit cards or loans, also known as equitable distribution.  Obtain a full credit report for you and your spouse, so there are no surprises regarding who owes what.

#4 Ignoring Tax Consequences

Almost every single financial decision you make during a divorce comes with a tax bill.  Should you take a monthly alimony payment or a lump sum payment?  Which is better, a brokerage account or retirement plan.  Do you keep your house or sell it, and more importantly, who pays the mortgage until it sells?  Even if you’re awarded an investment account with gains of $100,000 or more, know the portfolio comes with a tax hit, lowering the amount you’ll receive.  Even providing child support payments can have tax implications, so it’s essential to consult a Certified Divorce Financial Analyst (CDFA™), accountant, or tax advisor before splitting up your assets.

#5 Forgetting About Health Insurance

If you’re currently insured under your spouse’s health insurance policy, you may be in for a surprise, especially if you divorce before you’re eligible for Medicare at age 65.  Essentially there are three options: you can obtain health insurance coverage from your employer, you can sign up for insurance through your state’s health care exchange under the Affordable Care Act, or you can continue using your ex’s existing coverage through COBRA for up to 36 months.  Be aware, the cost for COBRA coverage is likely to be substantially more than what you paid for the same coverage before your divorce.

#6 Rolling Over Your Ex’s Retirement Account Into an IRA

IRA laws carry more prevalence than the financial difficulties of divorce: If you fund your own IRA with your share of your ex-spouse’s retirement account and tap into it before age 59.5, you’ll still have to pay the standard 10% early withdrawal penalty.  Here’s one solution: You can protect the assets in your divorce settlement through a qualified domestic relations order (QDRO), which allows you to make a one-time withdrawal from your ex’s 401(k) or 403(b) without paying the 10% tax penalty, even if you’re under age 59.5.

#7 Supporting Your Adult Children

When you’re going through a divorce, your first priority is to ensure you have a healthy retirement income and are financially well.  No matter how much you’d like to help your children or grandchildren, make sure you have taken care of your own financial needs first.

#8 Hiding Assets

If you’re going through a divorce where a lot of money is at stake, it’s easy to be tempted to try to hide assets to look like you have less money.  Don’t do it. Not only is this behavior unscrupulous, but it’s also illegal.  It could set you up for additional legal fees and court time if the assets are found.  Repercussions for hiding assets from your spouse during divorce include a settlement that will give your spouse additional assets, a contempt of court ruling, fraud charges, or perjury charges.  No matter how contemptuous your situation is with your soon-to-be-ex, it’s not worth it.

#9 Underestimating Your Expenses

When your income suddenly decreases after your separation or divorce, you may have to make some changes to your spending in order to afford your daily and monthly expenses.  Take a realistic look at how much money you’ll need to continue your current lifestyle, and make sure you can cover all of your expenses without relying on your ex.

#10 Thinking Your Divorce Advisors Are Your Friends

What you pay your divorce advisors comes out of the settlement amount you receive.  Keep track of exactly how much your advisors are spending on your behalf.  Remember that your attorney, CPA, therapist, or mediator is not a benevolent confidant or close friend whom you can thank with a cup of coffee. They’re a paid professional billing you by the hour.

#11 Overlooking the Value Of a Future Pension

Any portion of a pension that was earned during the marriage should be included in the marital assets.  Pensions can be handled in three different ways:

  1. The non-employee spouse can receive his or her share of a future benefit;
  2. The pension can be present valued and offset;
  3. A combination of (1) and (2).

Every situation is different, and the pension option you choose should make the most sense to you.  Take things such as your age, career/current salary, and your children’s financial needs into consideration when choosing your pension option.

#12 Not Having a Divorce Team

It would be best to have a team of professionals in your corner when going through a divorce.  Your team should consist of a divorce attorney and a Certified Divorce Financial Analyst (CDFA™) at minimum.  You should also consider a mediator, an accountant, a business pension valuator (where applicable), and a therapist if needed.

Although it’s easy to think that the more professionals you hire, the more costly your divorce will be, it’s not necessarily true.  In the long run, having the right help will reduce your litigation costs and could even save you from making costly mistakes.

Divorce can be calamitous at any age, but you can save yourself from financial heartbreak in the future with thorough planning and by avoiding common financial pitfalls. 

Ready to talk with a Certified Divorce Financial Analyst?  Contact Spectrum today to schedule a consultation with CDFA™ Leslie Thompson.

This content is developed from sources believed to be providing accurate information, and provided by Spectrum Management Group. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.