Divorce misstep after 50 can be catastrophic

The Bakersfield Californian
May 13, 2011

Fans are watching in horror as the fallout from the bitter divorce war of Jamie and Frank McCourt, the owners of the Los Angeles Dodgers, jeopardizes a long-treasured baseball franchise. With accusations flying, the meltdown of the McCourts’ 30-year marriage has become so toxic that the commissioner of Major League Baseball stepped in to take over management of the Dodgers in April. The McCourts are accused of being less interested in the well being of their baseball team and more interested in inflicting financial mayhem on each other.

Theirs is not the only high-profile marriage to explode onto the headlines. Former California Gov. Arnold Schwarzenegger and his first lady, Maria Shriver, announced their separation just days after the couple celebrated their 25th wedding anniversary.

Last summer, former Vice President Al Gore and his wife, Tipper, called an end to their 40-year “storybook marriage.” In hindsight, friends and marriage experts said there were subtle cracks in the Gores’ marriage, likely worsened by family and political tragedies. But still, the breakup was a shocker, leaving many to wonder: If the Gores can’t make it through a lifetime of marriage, who can?

But the truth is that there is nothing “sacred” about longevity. As boomers skid to the finish line of their lives, many are doing so without the man or woman they vowed to cling to decades earlier.

I have seen this trend among my boomer financial clients. They spend years pinching their pennies to pay off their student loans, buy homes to raise their families, create college funds for their children and plan for financially secure retirements.

Just when you think they have made it, life happens. They divorce.

Their breakups may be as bitter as the McCourts’, or as amicable as the Gores’. Whatever the case, they are left to live out their retirement years with fewer assets. Likely the retirement they will be “enjoying” separately will be less financially secure than if they stayed married.

Strangely, as the nationwide divorce rate has declined slightly over the past 20 years, it has doubled for people over 50 years of age, reported the National Center for Family and Marriage Research at Ohio’s Bowling Green State University. According to the center’s recently released study, the number of “gray” divorces rose from 4.67 divorces per 1,000 people in 1990 to 9.74 divorces per 1,000 people in 2008.

Experts blame the increase on a number of factors: The stigma of divorce is disappearing. Retiring boomers are healthier and more energetic. Boomers have different attitudes than their parents and grandparents.

“As life expectancies increase and baby boomers replace their more traditional elders as seniors, it is likely that the number of people going through a divorce at midlife or older will increase,” predicted Dr. Xenia Montenegro in the recent AARP-sponsored study “The Divorce Experience: A Study of Divorce Midlife and Beyond.”

While younger couples often focus on the well-being of their children when they divorce, couples in their 50s, 60s and 70s who divorce tend to focus on their financial security, inheritances, business relationships and reactions of their adult children.

I am not a marriage counselor. I am a financial planner. I cannot address the wide range of emotional consequences of a divorce. But I have seen the toll divorce has taken financially on several of my clients.

The biggest mistake couples make during divorce is not properly dividing property. So many times retirement and investment accounts are either forgotten or improperly listed in the settlement agreement.

It is important to list each account by name and account number to prevent any confusion. Investment companies require copies of the divorce decrees before names and beneficiaries can be changed on accounts. Seeking qualified legal and financial advice is crucial when dividing property. Issues to consider:

Retirement funds: For people over 50, their most significant assets, other than their homes, may be in their tax-deferred retirement funds, such as 401k accounts. When dividing property, consider the “true value” of these funds, which is not the dollar amount. When funds are withdrawn from tax-deferred accounts, taxes must be paid. Depending on the tax rate, the “true value” could be only about 65 percent of the dollar amount. For example, for the wife to receive a house valued at $200,000 in exchange for the ex-spouse to receive a retirement fund containing $200,000 might not be an equitable split.

Don’t make early withdrawals: If possible, divorcees should avoid cashing in retirement accounts. Retirement account assets are almost always taxed as income and when withdrawn prior to 59 1/2 will be assessed an additional 10 percent early withdrawal penalty from the IRS. It is not uncommon to see 50 percent of an account go to taxes and penalties when withdrawn. There are too many stories of ex-spouses, mostly women in this case, who cashed in their ex-husband’s retirement account to get by after divorce. They later find themselves still working up to 70 years of age to catch up on paying into Social Security to increase their retirement benefit. Had they rolled that money into an IRA and let the money compound over the years, it would have had the potential to provide extra income on top of Social Security.

Alimony: If one spouse has not worked for many years or earns considerably less than the other, alimony may be desired. But the older divorcees get, the greater the likelihood that the “wealthy” alimony-paying spouse will die. Rather than depend on monthly alimony payments, consider taking out a life insurance policy on the ex-spouse. If the financial situation of the spouse who is receiving the alimony improves and he or she no longer relies on the monthly payments, put the money into a pre-tax retirement account. Depending on a person’s tax bracket, contributing the after-tax alimony to a pre-tax retirement account can increase the value of the alimony by 15 percent to 35 percent.

Social Security: Even in a divorce, a spouse may be entitled to the ex-spouse’s Social Security benefits. This depends on the length of the marriage and a number of other factors. The Social Security Administration can advise about benefits, which should be considered in the settlement equation.

Debt: As with assets, debts should be split equitably in a divorce. I advise my divorcing clients to obtain credit reports on each other. It is amazing how these reports can reveal undisclosed debt, unknown credit card accounts, etc. A divorce decree will not dissolve “joint debt.”

Divorces late in life can be financially “unforgiving.” There is little time to recover from a misstep. People should seek expert advice from attorneys, accountants and financial planners.