Divorce isn’t easy in the first place, but it can particularly take a wrecking ball to family finances.
That’s especially the case for older Americans either nearing or already in retirement.
According to the Allianz Center For the Future of Retirement, the divorce rate among adults aged 65 and older, often called "gray divorce," is increasing. That sentiment is backed up by a major Bowling Green University study, which found that 36 percent of U.S. divorces occur among adults aged 50 or older.
“The only age group with an increasing divorce rate is adults aged 65 and older, raising new questions about how they will navigate old age,” the Bowling Green study noted.
That trend could easily drain a retiree’s savings account at a time they need the cash the most. “Nobody wants to prepare for a divorce,” says Kelly LaVigne, vice president of consumer insights at Allianz Life. “But divorce later in life – especially after retiring – is increasingly common. ... [Retirees] may need to delay their retirement to accumulate more savings and consider additional risk management strategies to ensure their funds can last their lifetime.”
Divorce can lead to multiple financial setbacks for divorcing retirees, and when combined, they represent a serious threat to both spouses’ financial health. These impactors lead the list.
The 50/50 split takes a toll.
The standard 50/50 asset split among retirees can significantly alter a divorced retiree’s golden years.
“In New York, for example, retirement accounts are part of the marital assets and long-standing clear laws support dividing those accounts 50/50 (minus any separate deposits that happened before the date of marriage),” Morghan Richardson, a divorce lawyer and partner at New York City-based Tarter Krinsky & Drogin LLP, told NTD via email. “This can be devastating to couples who are already in active retirement and using those pension funds, because many times the monthly payments must be split. And generally speaking, having one house and one set of utility bills is cheaper than having two.”
A 50/50 split can effectively cut each spouse’s projected retirement income by roughly a third once you factor in lost future growth, taxes, and higher living costs post-divorce. “For couples 55-plus, there’s less runway to rebuild, so every $100,000 removed today can translate into $160,000-plus of lost income over a 20-year retirement (assuming a 5% annual return),” Jamie Lima, founder at Allegiant Divorce Solutions in San Diego, California, told NTD by email.
The time factor works against divorced retirees.
With a shortened retirement saving timeline after divorce, the financial impact can be large.
“Unlike younger individuals, they have less time to rebuild their savings before retirement,” Paul Seabrook, founder and CEO at Seabrook Law Offices in San Jose, California, told NTD by email. “If one spouse is financially dependent or out of the workforce, they may find themselves with significantly reduced income and assets at a time when earning capacity is already limited. I've seen clients delay retirement by years or scale back their lifestyle dramatically to cover for the loss in assets.”
Even younger divorcees lose financial momentum.
Younger couples are also impacted by divorce and their ability to save for retirement.
Beyond the immediate division of any retirement assets they have accumulated, younger spouses are likely to have a new budget with a new life. “They will most likely take on single-income household expenses, lose disposable income and ability to save, lose out on compound growth, or get stuck with early withdrawal penalties if they need cash,” Seabrook said. “The long-term opportunity cost is enormous, especially if they don't revise their retirement strategy after divorce. So be careful who you marry.”
Wise money management advice for older divorcees.
While proper retirement savings management is an uphill climb for older divorces, some steps can be taken to mitigate the financial damage. Lima advises taking these strategies to the table when recasting finances after a marital split.
- Create a joint post-divorce budget first. “That keeps negotiations anchored in reality,” Lima noted.
- Prioritize tax efficiency: Trading a Roth IRA for a pre-tax 401(k) may look equal on paper, but not after taxes.
- Use a mediator or collaborative team. “That keeps legal costs down and preserves assets for retirement,” Lima added.
- Finalize the Qualified Domestic Relations Order, which allows couples to split 401(k) plans and individual retirement accounts, before the divorce decree is signed. “That way, no one is locked out of plan-specific benefits (like early-retirement subsidies,” Lima added.
- Revisit Social Security claiming strategies. Divorced spouses who have been married for 10 years or more may qualify for ex-spousal benefits that can help soften the financial impact.