Divorce rates for people age 50 and over have doubled since 1990, according to the Pew Research Center. Divorce can have both positive and negative impacts on happiness and finances.
Michael Finke, chief academic officer of the American College of Financial Services, stated at a conference that recently divorced women between ages 60 and 65 are the happiest of divorcées, though married retirees are generally the happiest group on average.
In terms of finances, especially in retirement, divorce creates new challenges and planning opportunities. The increase in divorced and single retirees has created a need for advisers to understand different retirement planning strategies.
Divorce impacts American's largest retirement income source: Social Security. While a number of nuances surround Social Security planning and divorce, the general rule is that an individual can claim benefits based off their ex-spouse's work history if:
• They were married for 10 years.
• They are not currently married.
• The ex-spouse is also eligible for benefits and over the age of 62.
An individual is entitled to 50% of the ex-spouse's primary insurance amount at their full retirement age. However, the spousal benefit must be larger than their own worker's benefit to really have any impact. The worker's benefit will generally be paid first unless the individual was still eligible for a restricted filing strategy after full retirement age. To claim benefits, you need to have the ex-spouse's Social Security number. Claiming off an ex-spouse does not impact their own benefits.
Because retirement accounts are often some of the largest assets a couple holds, they become hotly contested items during divorce. An individual owns an IRA, 401(k) or other retirement account — it's not available to most creditors. The accounts can be split up through a divorce process under something called a qualified domestic relations order. The precise document and language needed will depend on the account being split up, the situation and divorce agreement.
Pensions also can be split. Alongside 401(k)s, both can prove more challenging than splitting up an IRA, as dividing these assets can require a lot of negotiation, paperwork and careful wording. It's also important to change beneficiary designations after splitting up an account, as ERISA-controlled accounts will default to the beneficiary designation — even if you already paid out half the account to the ex-spouse but forgot to change the beneficiary form.
Home equity is the largest asset for most retiring couples in the United States. While the house is not necessarily always viewed as a retirement asset, in a lot of ways it's America's largest retirement savings vehicle. People pay down their mortgages and store a vast amount of their overall wealth in their home equity.
As such, divorce often requires figuring out who will keep or sell the home and how to split up home equity. In many cases, one spouse stays in the home and essentially pays out the other spouse for their half of the home. This could require the spouse keeping the home to take on a new mortgage entering retirement, creating a cash-flow nightmare.
Another option is to sell the home and split the proceeds. Additionally, a reverse mortgage can be an effective way to cash out roughly half of the home value to pay out one spouse. And it allows the spouse who plans to age in the home during retirement to keep the house and not have a monthly mortgage payment.
Retirement planning is difficult because of the uniqueness of each situation. With a growing number of divorced and single retirees, advisers need to be up to date on planning strategies, the impacts of divorce and how they can add value. In most cases, advisers will need to engage a qualified attorney to help with this planning, as splitting up retirement accounts can be extremely complex and careful planning is needed.
Jamie Hopkins is director of retirement research and vice president of private client services at Carson Group.