How to avoid financial disaster during divorce
Grey divorce applies the law of unintended consequences. After-50 divorce is growing fast — and blowing apart divorcing spouses’ retirement plans.
Between 1990 and 2010, the divorce rate among individuals 50 and older doubled, according to the National Center for Family and Marriage Research at Bowling Green State University in Ohio.
Late-life breakups now account for one in four divorces. And they are destroying even the best financial planning.
“Most couples plan for retirement on the assumption they will be living together. When that assumption falls apart, it’s not just a division of wealth but a doubling of the costs that makes both partners poorer,” said Annamaria Lusardi, an economist at George Washington University.
Suddenly, it’s not one house or apartment but two with all the related expenses. You’re not sharing the cost of a visit to the grandchildren – you’re visiting separately. Overall, estimates of how much more it costs for two people to live separately rather than together are as high as 30 to 40%.
“[Divorce] is the largest financial transaction of your life, because every part is moving, from car insurance to credit reports to your ability to get financing,” says Carson Steinbauer, Plano, Texas family law attorney.
“People get into this process and they’re overwhelmed,” she said. “They don’t know what to do, and they start making rash decisions.” She and other experts advise beginning with the basics: “Start with what you own and what you owe.”
If your first call is to a divorce lawyer, make sure that attorney qualifies as a financial expert or works closely with one. A good financial advisor or CPA can help you understand what’s at stake and also may also note anomalies in accounting for your assets that suggest less than full disclosure.
“It’s important to understand more than just the face value of an asset, says Mark R. Parthemer, managing director and senior fiduciary counsel of Bessemer Trust of Palm Beach, Fla. “You need to understand the future value of assets because real estate perhaps is going to have a different growth than a deferred retirement account,” he says. “Liquidating assets also can have different tax consequences.”
For instance, a Roth IRA and a regular IRA may have equal balances, but withdrawals from the regular IRA will be taxable while those from the Roth will not because taxes were paid when the money was set aside to grow forever after tax-free.
“Try to peel away the money from the emotions and understand the outcome you’re going to achieve and how that’s going to launch you into the next stage,” says Steinbauer. She notes that going through mediation to obtain a divorce can save money, too. Mediation is required for people divorcing in the major cities of Texas and most courts in North Texas.
She advises clients who are divorcing to not discuss details of the divorce with anyone outside the case and not get entangled in new financial relationships right away.
“Businesses always prepare for losses, but people never set money aside to pay for divorce lawyers or two households,” says Steinbauer, managing partner of Carson Steinbauer Family Law in the Shops at Legacy in Plano. “In fact, they always envision the exact opposite – that one of them will die and one person will have the income meant for two.”
She tells couples to examine their marital partnership to see “if this is a really good partnership.” In many cases, she recommends a prenuptial agreement.
“Pre-nups are not very popular because they’re not very romantic,” she says. “It’s a hard sell to look at the money aspect of a marriage even before it happens, but those that do are better off.”
Didn’t negotiate a pre-nup? You might consider a post-nup, reaching agreement on similar issues after you’re already wed.
Laws covering postnuptial agreements vary by state, as do laws governing how assets will be divided in a divorce in the absence of an agreement. Texas is one of the nine community property states, where assets acquired during the marriage will be split 50-50. In other states, the rule is “equitable distribution,” which means assets will be split fairly but not necessarily equally.
“When the marriage has lasted 30 or 40 years and you just came to the point where you’ve grown apart and can’t recapture what you had,” Steinbauer says. “It’s less about ‘I hate you’ and more about ‘I need to do this for me. But paying more than is reasonable can put you in financial danger.”
Divorce attorneys like Carson Steinbauer are paid to protect aging clients from that danger. She realizes that time is short and older divorcees don’t have the time or ability to rebuild their finances.
“Happiness should not be so expensive that you can’t afford to enjoy the rest of your life.”