Divorce at any age will send tremors through your finances. But when it comes later in life, it's sure to upend even the best-laid financial plans.
See Also: Claim a Benefit From an Ex-Spouse
The end of a marriage is the start of a scramble to protect your financial security. You must untangle the savings and investment accounts, real estate and other assets accumulated during your marriage. You also must update your estate plan and replace health insurance coverage that you could lose when you split from your spouse.
If you're divorcing late in life, "you may have to consider going back to work, selling your house or cashing in a life insurance policy—things you may not have intended to do," says Sara Stolberg Berkowicz, a Skokie, Ill., financial planner who specializes in divorce. To minimize the financial damage, it's vital to stay vigilant throughout the divorce process.
A growing number of older people are facing these challenges. The divorce rate among people age 50 and older doubled in the two decades ending in 2010—even as the overall divorce rate remained flat, according to a study by researchers at Bowling Green State University. One factor: Because baby boomers were the first generation to divorce and remarry in large numbers at a younger age, the study notes, a larger share of older adults' marriages are now dissolving because second marriages are even more likely to end in divorce.
The financial fallout can be devastating. Older people living alone after a split lose the safety net of a spouse's income as well as the economies of scale that come from sharing household expenses. A late-life divorce can be particularly hard on women, who are more likely to have spent years out of the workforce. That makes it tougher to find a job with enough income to sustain them through a longer life expectancy. While men's household income falls more than 20% after a divorce, women's falls 41%, according to a recent report by the U.S. Government Accountability Office.
The bottom line: For late-life divorcées, the split tends to be "the largest financial transaction of their lives," says Justin Reckers, chief executive officer of Pacific Divorce Management, in San Diego. Here are some key questions to ask before, during and after a divorce proceeding, so that your financial security lasts long after your marriage ends.
Where's the money? Before you can begin to divide your marital property, you need to know what that property is. Marital property includes the money you or your spouse earned during the marriage and the things you purchased with that money. (Generally, property you brought into the marriage or inherited is considered separate property and won't be divvied up in the divorce, although state laws differ.)
Taking stock of your property may seem straightforward. But even financially savvy spouses can easily overlook assets. Did your spouse have a pension plan at that small employer he left 20 years ago? Has a self-employed spouse overpaid estimated taxes in the year leading up to your split, hoping to quietly pocket a sizable refund? "When I got divorced, there was a bank account I didn't know anything about," says Cindy Conger, a wealth manager in Little Rock, Ark. "And I was the one who handled the finances. That was a shock to me."
Another easily overlooked asset: capital-loss carryforwards. You can deduct up to $3,000 of net investment losses per year, and losses above that amount can be carried forward and used to offset taxable gains in future years. "I've seen quite a few older couples come through in the last five years who made the mistake of selling everything at the bottom and taking huge capital losses," Reckers says. "And if you don't divide those in the settlement, one person will not get the benefits of those tax-loss carryforwards."
Collect tax returns, pay stubs, property deeds, vehicle registrations, insurance policies, account statements and even frequent-flyer and other awards-program documents. To size up liabilities, collect credit-card statements and loan documents, and order a free credit report at www.annualcreditreport.com.
A financial planner can help. A certified divorce financial analyst must have three years of related professional experience and meet certain examination and continuing education requirements. To find an analyst near you, go to the Web site of the Institute for Divorce Financial Analysts at www.institutedfa.com.
What are the tax consequences? A settlement that seems fair at the time of divorce can feel deeply inequitable a few years down the road if you don't factor in future tax bills.
Consider a $100,000 Roth IRA, which allows for tax-free distributions in retirement. It may be worth far more than a $100,000 brokerage account full of appreciated securities, says John Sweeney, executive vice-president of retirement and investing strategies at Fidelity Investments. "Understanding the tax status of assets in the accounts is incredibly important because that's really your purchasing power," Sweeney says.
Rather than giving one spouse a Roth IRA and the other a 401(k), older couples might want to divide each account between the spouses, says Barbara Shapiro, a Dedham, Mass., planner specializing in divorce.
Another tax factor to consider: Alimony is taxable to the recipient, and tax-deductible for the payor. If you're receiving alimony, you may want to have more money withheld from your paycheck. Also consider whether an alimony check may bump you into a higher tax bracket or even make your Social Security benefits taxable, says Lisa Greene-Lewis, lead certified public accountant at TurboTax.
How can we split our retirement savings? Moving IRA assets between divorcing spouses is relatively straightforward. One spouse can write a letter authorizing his IRA custodian to transfer money directly to an IRA for his former spouse. The transfer will be tax free if done under a divorce decree. Just "make sure it's direct from the custodian of one IRA to the other, and don't touch those accounts," which could cause the IRS to consider it a taxable distribution, Berkowicz says.
Dividing 401(k)s and defined-benefit pension plans can be more complex. You'll typically need a qualified domestic relations order—a state-court order that must be drafted by a lawyer, approved by the retirement-plan administrator and signed by a judge.
Because a delayed and poorly worded QDRO can cost you big bucks, it pays to get your QDRO started early and monitor its progress. In the case of pension plans, for example, "time and again we've heard from women whose lawyers did not know to ask for survivor's benefits," says Karen Ferguson, director of the Pension Rights Center, so the pension payments stop when the ex-husband dies. Another problem: A divorcing woman's QDRO fails to mention special early-retirement benefits, which allow her ex-husband to retire early and still get a full pension. "If she doesn't know to ask that the court order include this eventual right for the enhanced benefit, she won't get it," Ferguson says.
It can pay to find a lawyer specializing in pensions. Find pension counseling projects and legal service providers offering free assistance in your area at the Pension Rights Center's www.pensionhelp.org.
Nancy Keeling Davis, 63, has seen the advantages of doing your benefits homework during a divorce—as well as the price to be paid when you don't. Her 33-year marriage, which ended in 2005, spanned all but six weeks of her former husband's 25 years in the Army. She now gets 50% of his retirement pay.