Divorce proceedings are no longer isolated to younger generations. Today those over the age of 50 account for nearly 25% of all divorces, up 15% from 2 decades ago. These causes range from the increased financial independence of women to growing apart after children leave the nest. Instead of planning for a retirement together, couples are dividing household assets with long term financial consequences.
A divorce is costly beyond the decisions about who gets to keep what. The cost of living for two individuals is much higher than when you are living together. The same household income must now cover the cost of maintaining separate residences which raises overall living expenses by as much as 50%.
Savings or retirement accounts are often reduced as money is funneled into attorney and counseling costs instead of retirement goals. Lower overall household income also reduces the amount of money available for long term financial needs, during a time in your career where income may be tapering off. On average, household income drops 25% for men and a whopping 40% for women. With longer life expectancies, this can leave women paying for a longer life with less money.
Dividing property at the peak of your earning years can throw you off track for retirement and leave assets in need of protection.
Steps You Can Take to Guard Your Finances
- Consider Tax Consequences of All Decisions. Selling the home, moving retirement accounts from one name to another, and addressing other financial divisions may all have tax consequences. Obtaining a QDRO (Qualified Domestic Relations Order) may offer tax benefits and allow you to gain access to retirement funds based on the divorce settlement, without the tax penalty. Selling your home, cashing in CD’s early, and selling stocks can all be impacted by taxes.
- Update Estate Plan. Along with dividing assets and liabilities, there is also the issue of reassigning beneficiaries for retirement accounts, life insurance policies, wills or estates. State laws often render wills void once a divorce is final, leaving you with intestate laws to dictate the distribution of assets, instead of your estate plan.
- Plan for The Cost of Independent Housing. One of the single biggest added expense is separate housing. There is the question of who will keep the house or will you be better off to sell it and divide the profits, giving you both funds to move on without disturbing other assets. Up to $500,000 in profits is sheltered from taxes if the house is sold before the divorce is final. Afterward, you only get half that amount tax free. There is also the question of whether either can afford the house with reduced income. Even though you may love the house, if neither spouse is able to comfortably maintain the mortgage, it may be best to sell sooner than later.
- Know What You Owe. Debt accumulation has reversed itself and older couples often carry more debt than younger counterparts. This leaves couples not only dividing assets but also debts. Divorce lawyers and judges do not always take lender contracts into account when deciding which party is responsible for what bills. This could leave you owing on a debt you have not signed for, based on the divorce settlement agreement. Your ex-spouse could potentially owe debts in your name, that the lender will still hold you accountable for. A divorce court requiring your spouse to pay a debt in your name will not negate a lender's ability to exercise their rights to collect on the debt.
- Beef Up On State Laws. Divorce proceedings are determined by the state where you live and will operate under equitable distribution or community property laws. Equitable distribution laws divide assets with a focus on being equitable and fair, not necessarily equal. States with community property laws focus on dividing property equally regardless of how an asset or liability is titled. These laws could leave you responsible for debts or assets that are solely in your ex-spouse’s name. All states primarily divide assets acquired during the marriage and consider ownership prior to the marriage, inheritances, and length of marriage when determining how property should be divided.
- Inventory Assets beyond retirement accounts. Real estate, asset balances on insurance policies, investments, checking and savings accounts must all be divided. Not everything must be sold and split in half. If you both have approximately the same in retirement funds they may stay intact. You may choose to take the more liquid retirement assets and give up equity in the home, or vice versa. Beginning with a complete inventory will help you compare values across asset classes and come up with the most cost effective way to divide future ownership.
- Review How Accounts Are Titled. Legal obligations are enforced based on the title. Joint accounts should be moved to individual accounts based on the divorce agreement so payment issues do not require you to return to court. This will save you money and protect your credit, providing a clean financial break once the divorce is final.
- Pay Attention to Your Credit. One of the frequent victims of divorce is the credit of both parties. There are arguments around who is paying what bills and the result are bills left unpaid. Divorce agreements can continue the fight if both parties do not follow through as the judge dictates. New housing typically results in a credit check for the apartment, home loan approval needed, and qualifying for utilities in your own name. Letting your credit suffer will cost you more when you reestablish yourself in another residence and that could eat up valuable savings.
- Minimize Attorney Fees. Savings can be lost due to high attorney fees. The more you can agree on, the better you can control those costs. Attorneys are not your confidant or friend. They are a professional charging by the hour for their time. Every phone call fighting over who gets what will reduce the amount of money there is to divide. Consider carefully the total cost of making a stand on certain ‘cherished items’ and compare that with the cost of letting it go.
- Reevaluate Insurance Needs. Everything from health insurance to life insurance should get a review. You may need more or less insurance than you currently hold and you may need to add insurance for disability or long-term care, which may have been considered unnecessary prior to the divorce.
Getting your ducks in a row can reduce costly mistakes which are common when older couples part ways. Taking measures to protect your assets will get you back on track quickly and help you prepare for your impending retirement.
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