The True Cost of Gray Divorce
Typically, the longer you've been together, the more assets you've acquired, and the more expensive the process. I've seen couples spend $200,000 in legal fees. And you have less time to recover financially from divorce the closer you are to retirement.
You’re sitting across the kitchen table from your spouse, when they inform you that they want to separate. After decades of marriage, you’re facing divorce.
While becoming unwillingly single can be difficult at any stage of life, splitting up after the age of 50 can be doubly devastating, because you have a limited amount of time to financially recover before retirement.
According to Pew research, you’re hardly alone. That’s because while the American divorce rate has actually declined for every other age demographic, the divorce rate among U.S. adults ages 50 and older has roughly doubled since the 1990s.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
America is facing what’s being called the “gray divorce epidemic.” Many studies have been done about its cause, some concluding that once the children leave the nest, couples discover they’ve lost their shared purpose and don’t have much in common anymore. But no matter what the underlying cause, divorce is expensive, and once it becomes inevitable, you have little choice but to reactively take steps to protect yourself financially.
How Expensive is Divorce?
Right from the first phone call, depending on their ZIP code, a divorce attorney might charge you anywhere from $250 to $650 an hour. In brass tacks, the average cost of an amicable divorce falls somewhere between $25,000 and $50,000. But being that divorces are typically emotionally charged, clean breaks are rare. Typically, the longer you’ve been together, the more assets you’ve acquired, and the more expensive the process.
I’ve seen couples spend $200,000 in legal fees in a tug of war over a $1.5 million estate. That’s partly because older people, while usually not involved in long, drawn-out child custody battles, have less time to rebuild financially, which means divorce can literally be a fight for your future standard of living.
It’s difficult to recover from divorce when you’re older because, after 50, you’re more likely to have maxed out your earning potential, your assets may be mostly fixed, and your employment opportunities tend to become more limited. And while it’s true that older divorcers generally have more assets than younger people, they often don’t have as much money as they think they do.
Case in point: I worked with a 67-year-old client who had over $1.5 million in a traditional IRA, and whose husband had filed for divorce. He was insisting that he was entitled to half that amount, or $750,000. He wanted a cashier’s check.
He’d forgotten that the money in traditional IRAs — and also 401(k)s — is taxed when it’s withdrawn (the actual percentage depends on things like the amount of your other income, along with the amount of the distribution). Plus, if you’re under age 59½, an extra 10% early-withdrawal penalty may apply.
Of course, there are divorce decree exceptions, which allow the IRA or 401(k) participant to forgo the 10% penalty (if the money is rolled over into the spouse’s IRA), but the money is not liquid, and once it’s withdrawn, combined federal and state tax rates as high as 52% (depending on your state’s income tax rate) could be assigned.
And what about brokerage accounts? If you need to liquidate investments in your brokerage account(s) to settle a divorce decree, you’ll get hit with long-term capital gains (as high as 20%, but it varies).
How much you end up paying depends on the factors listed above (such as the tax rate of the state you live in), but I’ve seen jaws literally drop open in disbelief over the actual post-tax value of once-bragged about brokerage accounts.
Emotion: The Biggest Expense of All
But retirement and brokerage accounts can seem relatively straightforward when compared to the division of other assets. Probably the key asset that gray divorcers must divide is the value of the home.
What makes the home asset substantially more complex is that, often, one of the partners wants to stay put. This means they may have to give up their rights to other assets in return for a house that could experience a substantial decline in value in a relatively short period of time.
Emotional attachments to assets can be tricky. I worked with the family of a well-employed, recently divorced woman who bypassed her claim to all other marital assets in exchange for keeping the house, which, when appraised, had almost $1.6 million in equity. Even though she agreed to give up the balance of her 401(k), she was still only in her 50s, and with seemingly many more years left to work. At the time of the divorce, it appeared she’d made out reasonably well. Unfortunately, in rapid succession, she was forced to retire due to a health emergency that coincided with the onset of the 2008 real estate collapse. Eventually, with all her eggs in that one basket, she lost her only real asset to the bank via repossession.
But, conversely, throwing up your hands and agreeing to sell a house is not cheap, either. First, there are the repairs, upgrades and inspections, which often lead to still more repairs. Next, the cost disposal of the home is going to be at least 6% to 7% of its value.
Then, afterward, whether you go on to buy or rent, the next financial shock to the system of a gray divorcer is the current cost of housing, which is almost certainly higher than when you purchased the home. This means your budget is going to be strained and your settlement (or alimony, in certain cases) is going to quickly lose purchasing power.
Yet all of the above are just the basics. Other common financial sticking points for older divorcing couples include the division of debt, the difficulties of splitting hedge funds or private equity holdings, premarital assets that have risen in value, comingled inheritances that are now marital property, pensions, collectibles, Social Security, and the fact that the person paying alimony might be forced to carry life insurance with a death benefit for the duration of his or her obligation to their former spouse.
Stay Together, or Part as Business Partners
So, divorce is especailly costly for people over 50. Is there a solution? First, if you have no choice in the matter, and you absolutely must divorce, save time and money by knowing the precise value (and amounts) of every asset before meeting with attorneys. Meet with your Certified Financial Planner™ professional and your accountant, together with your spouse (if possible).
Another way to save substantial sums of money, if the split is amicable and the value of the assets are clear, is to steer negotiations and the division of assets and debts toward an experienced divorce mediator. There is no law that states you must hire a divorce attorney. As illustrated above, hiring attorneys could result in 15%, or even more, of your assets unnecessarily going to legal fees. Just remember, you were married to your spouse for a long time, and if you extend the olive branch, and are fair, even if the marriage can’t be saved, consider it a business transaction.
That 15% savings may make a huge difference to your standard of living down the line.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Scott Hanson, CFP, answers your questions on a variety of topics and also co-hosts a weekly call-in radio program. Visit HansonMcClain.com to ask a question or to hear his show. Follow him on Twitter at @scotthansoncfp.
-
Why Uber Stock Is Volatile After GM's Cruise Announcement
Uber stock is swinging this week following news that General Motors is restructuring its Cruise unit. Here's what you need to know.
By Joey Solitro Published
-
UnitedHealth Stock Falls as Lawmakers Eye Insurers, PBMs
UnitedHealth stock is continuing to fall Thursday after the introduction of bipartisan legislation targeting PBMs and healthcare giants. Here's what to know.
By Joey Solitro Published
-
Three Possible Tax Impacts for Retirees Under Trump
How might a second Trump term affect your tax bill in retirement — or the inheritance tax bill for your heirs? This pro has three predictions.
By Evan T. Beach, CFP®, AWMA® Published
-
What to Know About Leverage and Bitcoin's Meteoric Rise
Leverage in the financial world can lead to astonishing success or a crushing collapse. How are investors using leverage to invest in bitcoin?
By Stephen P. Harbeck Published
-
How Do You Know When It's Time to Change Financial Advisers?
Sometimes a breakup is for the best. Here's how to handle 'the talk' and make the switch to a new professional who's a better fit for you.
By Kelli Kiemle, AIF® Published
-
The Best Ways to Use Your Year-End Bonus (and the Worst)
'National Lampoon's Christmas Vacation' shouldn't be anyone's go-to for financial advice, but it does remind us how not to spend a holiday bonus.
By Frank J. Legan Published
-
LLCs: Power Tools That Can Create Big Problems
Forming an LLC for your business might seem like a straightforward endeavor, but if you don't know exactly what you're doing, trouble could follow.
By Rustin Diehl, JD, LLM Published
-
Never Talk About Money? For Women, That Can Spell Disaster
How can you plan for retirement when your husband holds the purse strings and talking about money is taboo? Help is at hand for this common problem for women.
By Cynthia Pruemm, Investment Adviser Representative Published
-
How Combining Your Home Equity and IRA Can Supercharge Your Retirement
While many retirees own an IRA and a home, very few are considering how they could work together in a plan for retirement income.
By Jerry Golden, Investment Adviser Representative Published
-
The Six Estate Planning Steps Every Blended Family Must Take
Whether your blended family is newly formed or fully fledged, use these six steps to review your estate plans now and lower the risk of conflict in the future.
By Stephen B. Dunbar III, JD, CLU Published