CPA INSIDER

What CPAs should know about ‘gray divorce’

Later-in-life divorces can upend clients’ retirement plans.
By Ilana Polyak

In an earlier era, typical divorced people might have been stressed-out parents in their 30s fighting for custody. Today, however, they're as likely to be empty nesters fighting over their rightful share of the 401(k) account.

While divorce for younger couples is becoming less common, the rate for people 50 and older has doubled since 1990, according to the Pew Research Center.

What's driving these so-called gray divorces? If you ask CPAs like Haleh Moddasser, partner and senior vice president with Stearns Financial Group in Chapel Hill, N.C., and author of Gray Divorce, Silver Linings: A Woman's Guide to Divorce After 50, it's longevity.

Since 1960, we've added nine years to our life expectancy. As Moddasser pointed out, "If you're adding life expectancy and feeling good, why would you stay in a marriage that doesn't make you happy?"

Add to that less stigma, higher earnings power for women, and the ability for people to reinvent themselves, and it's not hard to understand why more couples aren't willing to stay in unhappy marriages.

But divorce after 50 comes with a unique set of retirement challenges. "As we get older we accumulate financial complexity," noted Ginita Wall, a CPA specializing in divorce in San Diego and co-founder of the Second Saturday Divorce Workshops.

According to CPA financial planners, these are some of the most important things to keep in mind when working with older couples who are divorcing:

Gray divorce can wreak havoc on clients' retirement plans. When retirement is near, divorce can upend even the best-laid plans. In the accumulation phase, retirement planning centers on two people. A divorce means that suddenly two separate retirement plans have to be crafted, with all the complexity and expense that implies. "Maintaining two households instead of one is more expensive, [and] you're doing it by splitting the marital assets in half," Moddasser observed.

Gray divorce may lead one or both spouses to delay retirement. "If they still don't have enough for retirement [after a divorce], they'll need to earn more," noted Howard Hook, CPA, owner of EKS Associates in Princeton, N.J.

But that's not without its pitfalls, too. It can be difficult for older people to find work, Hook said.

That's especially true for women who left the workforce to raise their families. "What I hear from my women clients is, 'He can earn it back, but I can't,'" said Tracy Stewart, a CPA who specializes in working on divorce settlements in College Station, Texas.

Many divorce settlements are written in a way so that alimony lasts a couple of years, giving a spouse who has not worked outside the home time to look for a job or for retraining. Hook recommends that life insurance should be a part of a divorce settlement, as a way to guarantee the alimony payment.

Divorcing couples often seek advice too late in the game. Unfortunately, many divorcing couples don't seek the advice of a financial adviser until their settlement is finalized. But the best time to get financial advice is before negotiations have even started to ensure an equitable division of the marital assets, said Stewart.

For spouses who haven't held a job during the marriage, the division of property in divorce should focus heavily on which assets can lead to a better retirement outcome, said Wall. Her female clients often hold an emotional attachment to their home, though it may not serve them well in retirement.

"You're going to have to trade retirement plans in order to keep the house," said Wall. "If someone is in their early 40s and has another 25 years to build up their retirement savings, then that's perfectly reasonable. But not when you're going through a gray divorce."

Pay special attention to Social Security. Divorce can also complicate Social Security planning. CPAs need to be aware of what their clients are eligible for.

Former spouses are entitled to spousal benefits, which amount to half of the ex's benefit. The ability to start spousal benefits starts at age 62. But there are some caveats: The marriage must have lasted at least 10 years and the ex-spouse who is tapping the spousal benefit must not have remarried before age 60. CPAs can help their clients understand whether spousal benefits or a benefit based on their own records would produce the highest payment.

In addition, there's a wrinkle for those going through a gray divorce. Clients who haven't started spousal benefits before the divorce will need to wait at least two years after the divorce before becoming eligible for divorced spouse benefits, even if they are older than 62.

Divorce at any age is full of financial challenges, but gray divorce has a more immediate impact on retirement planning. To keep retirement intact, make sure clients are making decisions in their best interest every step of the way.

Ilana Polyak is a Massachusetts-based freelance writer. To comment on this article, email senior editor Courtney Vien.

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