When love won't keep them together

If divorce happens later in life, retirement plans can suffer

May 11, 2014 @ 12:01 am

By Darla Mercado

If late-in-live divorce can happen to Captain & Tennille, surely it can — and will — happen to some of your baby boomer clients. An analysis of data from U.S. Vital Statistics and from the American Community Survey reveals that back in 1990, about 206,000 people age 50 and over got divorced. That number climbed to 643,152 in 2010, according to a 2012 academic research paper, "The Gray Divorce Revolution: Rising Divorce Among Middle-Aged and Older Adults, 1990-2010."

And the number is forecast to surge to 828,380 by 2030, according to the paper's authors, Susan L. Brown and I-Fen Lin, professor and associate professor of sociology, respectively, at Bowling Green State University in Ohio.

Couples may have any number of reasons to split relatively late in life. Perhaps they realize that after decades together and raising children, they no longer have anything in common. Or maybe at retirement they find themselves less than than thrilled at the prospect of spending a big chunk of their time together.

NO TIME TO WASTE

Either way, a late divorce leaves financial advisers, attorneys and tax experts with very little time to ensure that both parties wind up with sustainable retirement income after unraveling decades of financial plans for a couple.

"Lots of these details — estate planning, insurance planning — get put by the wayside and people aren't picking them up until a problem surfaces," said Martin M. Shenkman, an estate planning attorney. "That's what makes silver divorce so unique: These people are more apt to have all of these issues."

Dividing assets is an essential part of divorce, but for splits that happen later in life, creating cash flow becomes a priority. All of the retirement planning up until then was made to sustain a pair through their golden years. Post-divorce, this can turn into one spouse stretching his or her income to cover the needs of two households.

Justin Reckers, managing director of Pacific Divorce Management and director of financial planning at Pacific Wealth Management, last year dealt with a divorcing couple in their mid-50s. The husband expected a large inheritance from his mother when she died, so he and his wife didn't invest aggressively. That proved to be a problem when the divorce came up and the wife would not have a stake in the inheritance. Mr. Reckers had to work a deal with the two that would allow the wife to receive retirement account assets and permit the husband to keep his inheritance.

CASH FLOW

"Couples make plans together, and it becomes difficult when these plans are blown up," he said.

Given that boomer couples approaching divorce are either at or near the end of their careers, the conversation changes to mustering cash flow. That means aggressive saving, budgeting, using Social Security strategies and minimizing taxes when splitting the largest assets.

'If you're talking about boomers, you're reaching a generation where likely both spouses have a retirement account — these are becoming the largest single asset to split up," said Ed Slott, a certified public accountant and head of Ed Slott and Co.

Though an individual retirement account can be split according to a divorce or separation agreement, a qualified domestic relations order, which gives a non-employee spouse the right to receive all or some of a worker's retirement assets, is required for 401(k)s. That's a distinction that can be overlooked as a couple decides who gets what. A division of a 401(k) without such an order will lead to taxes.

Those getting divorced also need to realize that when tax-deferred assets are split, the recipient will pay taxes upon withdrawal. So a fifty/fifty split of $500,000 in a 401(k) isn't really worth $250,000 for each spouse, Mr. Slott said. It's that amount, less any taxes incurred when withdrawals are made.

To help bolster retirement income, look to Social Security strategies. Avani Ramnani, director of financial planning and investment management at Francis Financial, recently had a client facing a divorce after about 25 years of marriage. The wife, who was eligible for Social Security, was able to bolster her income stream by claiming based on her ex's benefit while she continued working.

In the meantime, the wife also benefited from deferral credits, meaning her own Social Security income would grow by 8% per year for each year she delayed receipt of her own benefits. "You need to be creative and have an approach in order to get the spouse income to live on," said Ms. Ramnani.

BENEFICIARY FORMS

Another must-do for those getting late-in-life divorces: Update beneficiary forms for retirement accounts, as well as trustees and powers of attorney.

"You've been married for 40 years," Mr. Shenkman said. "Don't assume that your adult kids are still appropriate to name as powers of attorney. Don't assume they're not angry over what happened." Naturally, in-laws who may have been a good choice for trustee when the marriage was doing well may not be the best trustees after a divorce. Contact an independent trustee instead, Mr. Shenkman said.

"A young couple who's divorcing has time to recoup and rebuild," he said. "How do you rebuild at 65? Pull up your socks and do what you have to do."

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