Although divorce is a difficult transition at any age, divorce at or near retirement carries distinct financial uncertainty. Preparing for the cost of two separate retirements with a limited amount of time to individually re-accumulate assets can be tough. Also, dividing what could be (and often is) a lifetime of accumulated assets can be a daunting task. Although the added financial pressures of divorce at or near retirement may seem overwhelming, having the right conversations with your tax and legal professional along with your financial advisor can alleviate some of the strain. Below are some financial topics to consider when going through a divorce.
The first topic you might want to evaluate is the future value of both your retirement and non-retirement assets. When dividing assets between two parties, you should consider more than just the present value of an asset. Both the future value and accessibility must also be considered. A brokerage account with a present value of $1 million is very different than $1 million equity in a home. Similarly, a retirement account of $1 million is very different from the same $1 million in a brokerage account or $1 million in home equity. Moreover, a retirement or brokerage account can be accessed much more easily than the equity in a home.
Another consideration, especially if one party is financially dependent upon or earns significantly less than their spouse, is how to best claim Social Security benefits. If certain qualifiers are met, you may be able to take social security benefits based on the income of your ex-spouse. Specifically, if you were married for more than 10 years and are not married when you file for Social Security, you may be eligible to look at the benefit based on your ex-spouses record and your own. Also, if you were born before 1953, you can claim your ex-spouse’s benefit at age 66 in addition to waiting until age 70 to take your own benefit.1
Health insurance is also something to consider. Most people who previously have been covered by their ex-spouse’s group health insurance plan have two options: seek coverage through the Affordable Care Act, or continue coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA). COBRA allows a person to continue their health insurance for 18 months upon the occurrence of qualifying events such as a job layoff. However, if you lose coverage because of a divorce, the continuation window is 3 years under COBRA.2 These 3 years can make a huge difference for people with medical expenses that are nearing retirement but are still a few years away from Medicare eligibility.
Long-term care can be one of the most financially burdensome costs for people over the age of 65. For many people divorcing at retirement age, cancelling a long-term care policy or reallocating a long-term care savings plan to compensate for a retirement income gap created by divorce might be tempting. However, this could prove to be detrimental. Statistics from the U.S. Department of Health and Human Services show that nearly 70 percent of adults 65 and over will need some long-term care during their lifetime.3
Finally, you will need to review your estate plan with your legal representative, as it was most likely developed jointly with your now ex-spouse during your marriage with that person listed as the primary beneficiary and designated power-of-attorney. A further consideration might be to make provisions for your existing children if you chose to remarry.
Divorce in any stage of life is a major upheaval that can wreak havoc on a person both emotionally and financially. Divorcing at or near retirement only adds to the already long list of financial complications. Working with a financial advisor along with your tax and legal professional can be a great way to alleviate some of the anxiety of financial worries that come with divorce, while setting you up for retirement success.
2 U.S. Department of Labor
3 U.S. Department of Health and Human Services
Financial Advisors do not provide specific tax/legal advice and this information should not be considered as such. You should always consult your tax/legal advisor regarding your own specific tax/legal situation.