5 Key Financial Planning Considerations When Navigating a Gray Divorce

5 Financial Planning Considerations When Navigating Gray Divorce

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Divorce is never easy; oftentimes, it’s both emotionally draining and financially complex. However, gray divorce–a term that refers to divorces that occur after age 50–often comes with a unique set of financial planning considerations that can further complicate the divorce process.

I’ve helped my clients navigate the complexities of gray divorce, and despite the inevitable challenges, it’s possible to separate from a spouse while maintaining financial independence. If you’re considering a divorce or going through one, it’s important to be aware of the financial planning obstacles you may encounter, so you can approach the process with clarity and confidence.

Here are 5 key financial planning considerations when navigating a gray divorce:

#1: Retirement Funds and Pensions

The division of retirement funds and pensions is a crucial financial planning consideration in gray divorce. These assets often represent one of the largest components of your joint estate and can have significant implications for your financial security post-divorce.

First, know that the division of retirement assets in a divorce is subject to state law. Minnesota, for instance, is an “equitable distribution” state, which means assets are divided fairly, but not necessarily equally.

However, many states are “community property” states, meaning marital assets are split 50/50 in a divorce. The classification of your retirement assets as marital or separate property can also play a critical role in their division.

Dividing retirement funds in a divorce can also have significant tax implications, underscoring the importance of proper planning. For most employer-sponsored retirement plans, a qualified domestic relations order (QDRO) is necessary to divide the account without triggering taxes and penalties. Similarly, IRAs require a process called “transfer incident to divorce” to avoid similar penalties.

Pensions can be more complicated to divide, as you may need an actuary or other financial expert to value it for divorce purposes. Generally, you and your spouse can choose to divide future pension payments or offset the value of the pension with other assets.

Finally, here are a few strategic considerations to keep in mind when dividing retirement assets in a gray divorce:

  • Pay attention to the immediate value versus the future value. Some assets may appreciate over time, while others may provide steady income in retirement.
  • Different retirement assets come with different levels of risk and potential return. Managing these risks is crucial for long-term financial security.
  • Some retirement assets offer more liquidity than others. Depending on your age and financial needs, you might prioritize assets you can access without incurring significant penalties.

#2: Social Security Benefits and Gray Divorce

Another important consideration for many individuals going through a gray divorce is your eligibility for Social Security benefits based on your ex-spouse’s work record. If you’re eligible, you can claim up to 50% of the amount your ex-spouse would receive at their full retirement age (not including any delayed retirement credits they might earn by waiting to claim their own benefits).

To qualify for these benefits, you must have been married for at least 10 years, and your ex-spouse must be entitled to Social Security retirement or disability benefits. In addition, you must be unmarried when you claim Social Security benefits based on an ex-spouse’s record. If you remarry, you generally cannot collect benefits on their record unless the subsequent marriage ends.

You can begin receiving benefits on your ex-spouse’s record as early as age 62. However, keep in mind that doing so may result in a permanently reduced benefit if you claim before reaching your full retirement age. If your ex-spouse hasn’t yet applied for Social Security benefits and is 62 or older, you can still receive benefits based on their record if you have been divorced for at least two years.

It’s also important to note that if you qualify for Social Security benefits on your own work record, you can choose to receive either your own benefit or your ex-spouse’s benefit if it’s higher, but not both. You can also switch from one to the other if it becomes advantageous–for example, starting with benefits based on your ex-spouse’s record and later switching to your own benefits if they grow larger due to delayed retirement credits.

An experienced financial advisor like Align Financial can help you navigate the specific details of your situation, including the timing and sequence of claiming benefits, to maximize your financial stability in retirement.

#3: Health and Long-Term Care Insurance

Losing health insurance coverage due to a gray divorce, especially if you’re nearing retirement age but not yet eligible for Medicare, can be challenging. To manage both your health and potential financial risks during this transition period, it’s important to understand your available options for maintaining health coverage.

In most cases, your best options for securing health insurance before age 65 will be through COBRA, an individual healthcare policy, or the ACA marketplace. For a detailed overview of each of these options and the respective advantages and drawbacks, check out my blog post on the same topic: Health Insurance Considerations When Retiring Before 65.

Long-term care may be another key consideration in gray divorce, as your options for care may change with the loss of a spouse. As you navigate the aftermath, you may want to consider purchasing long-term care insurance to minimize the financial and logistical risks of needing long-term care later in life.

However, bear in mind that long-term care insurance premiums are based on your age and health at the time of application. The older you are, the higher the premiums will be.

Similarly, any existing health conditions may increase your premiums or even make you ineligible for certain policies. Given the complexities surrounding long-term care planning, it’s wise to consult with an experienced financial advisor or insurance specialist so you can confidently navigate this aspect of gray divorce.

#4: Housing and Real Estate

In any divorce, decisions regarding the family home can carry profound emotional weight and substantial financial consequences. This aspect of gray divorce can be especially difficult to navigate if you’re nearing retirement age, as you may need to consider how your decision impacts your retirement plans, and vice versa.

If your preference is to stay in your home, you’ll first need to assess its affordability on a single income. In addition to covering the mortgage payments (if applicable), you’ll also be responsible for property taxes, homeowners insurance, maintenance, and other incidental expenses associated with homeownership, which can be significant.

Furthermore, you’ll want to consider the feasibility of staying in your home as you age. If you plan to age in place, your home may need modifications, such as adding grab bars in bathrooms, a ramp for entryways, or a first-floor bedroom. In many cases, being in close proximity to healthcare services, shopping, community activities, and support networks are also crucial for aging in place.

On the other hand, you might decide it’s the right time to sell the family home and downsize to something more manageable. Depending on market conditions and the availability of suitable alternatives when you divorce, you may view this significant life change as an opportunity to start fresh in a new environment that’s better suited to your needs.

Of course, you’ll need to weigh the practicalities of moving against your personal readiness to relocate. Because of the emotional weight this decision often carries, it can be one of the most challenging aspects of gray divorce for many people.

#5: Estate Planning After a Gray Divorce

Lastly, updating your estate planning documents and beneficiary designations following a gray divorce is an essential step to ensure your assets and healthcare wishes are handled according to your current preferences. You may need to revise your will, amend trusts, and even reconsider your guardianship preferences if you have minor children.

In addition, be sure to review and potentially update your appointed agent for your healthcare and financial powers of attorney, especially if you previously designated your ex-spouse. It’s essential that these documents reflect your current wishes to ensure your best interests are protected.

Similarly, you’ll want to review your beneficiary designations for any retirement accounts and life insurance policies you hold. Updating your will isn’t enough, as these designations supersede a last will and testament.

Given the legal and financial complexities involved with estate planning, it’s a good idea to consult with an estate planning attorney, as well as a trusted financial advisor after a gray divorce. These professionals can provide advice on the best strategies for your situation while ensuring your documents are legally valid and aligned with your current wishes.

Navigate a Gray Divorce with Clarity and Confidence

The gray divorce process is inherently complex, presenting a unique set of challenges that blend emotional considerations with practical financial planning. By carefully balancing these considerations and seeking guidance from trusted professionals, you can navigate a gray divorce with clarity and confidence, paving the way for a secure and fulfilling next chapter of life.

Whether you’re navigating a divorce or simply looking for a financial partner you can trust, Align Financial is here to help. Our team is well versed in the nuances of gray divorce and can provide personalized guidance, addressing all aspects of your financial situation.

We can help you create a comprehensive financial plan that aligns with your values and goals, offering peace of mind throughout life’s major transitions. Contact us to learn more and see if we may be the right fit for your financial needs.

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Tanya Nichols, CFP®
Tanya Nichols is a fee-based CERTIFIED FINANCIAL PLANNER™ professional located in Duluth, MN and serving clients across the country. Align Financial takes a simple but deeply impactful approach to wealth management, connecting your money to your life in a way that feels right to you.

Because Align Financial is independent of Raymond James, the expressed written opinions above are our own and not necessarily reflective of Raymond James’ opinions. Read our full disclosure here.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and CFP® in the U.S.