Calculating the true cost of divorce at 50+
You’re sitting across the kitchen table from your spouse, when she informs you that she wants to separate. After decades of marriage, you’re facing divorce.
While becoming unwillingly single can be difficult at any stage of life, splitting up after the age of 50 can be doubly devastating, because you have a limited amount of time to financially recover before retirement.
According to Pew research, you’re hardly alone. That’s because while the American divorce rate has actually declined for every other age demographic, the divorce rate among U.S. adults 50 and older has roughly doubled since the 1990s.
America is facing what’s being called the “gray divorce epidemic.” Many studies have been done about its cause, some concluding that once the children leave the nest, couples discover they’ve lost their shared purpose and don’t have much in common anymore.
But no matter what the underlying cause, divorce is expensive, and once it becomes inevitable, you have little choice but to reactively take steps to protect yourself financially.
Right from the first phone call, depending on their ZIP code, a divorce attorney might charge you anywhere from $250 to $650 an hour. In brass tacks, the average cost of an amicable divorce falls somewhere between $25,000 and $50,000.
But being that divorces are typically emotionally charged, clean breaks are rare. Typically, the longer you’ve been together, the more assets you’ve acquired, and the more expensive the process.
I’ve seen couples spend $200,000 in legal fees in a tug of war over a $1.5 million estate. That’s partly because older people, while usually not involved in long, drawn-out child custody battles, have less time to rebuild financially, which means divorce can literally be a fight for your future standard of living.
It’s difficult to recover from divorce when you’re older because, after 50, you’re more likely to have maxed out your earning potential, your assets may be mostly fixed, and your employment opportunities tend to become more limited.
And while it’s true that older divorcers generally have more assets than younger people, they often don’t have as much money as they think they do.
Case in point: I worked with a 67-year-old client who had over $1.5 million in a traditional IRA, and whose husband had filed for divorce. He was insisting that he was entitled to half that amount, or $750,000. He wanted a cashier’s check.
He’d forgotten that the money in traditional IRAs — and also 401(k)s — is taxed when it’s withdrawn (the actual percentage depends on things like the amount of your other income, along with the amount of the distribution). Plus, if you’re under age 59½, an extra 10 percent early-withdrawal penalty may apply.
Of course, there are divorce decree exceptions, which allow the IRA or 401(k) participant to forgo the 10 percent penalty (if the money is rolled over into the spouse’s IRA). But the money is not liquid, and once it’s withdrawn, combined federal and state tax rates as high as 52 percent (depending on your state’s income tax rate) could be due.
And what about brokerage accounts? If you need to liquidate investments in your brokerage account(s) to settle a divorce decree, you’ll get hit with long-term capital gains tax (as high as 20 percent, but it varies).
How much you end up paying depends on the factors listed above (such as the tax rate of the state you live in), but I’ve seen jaws literally drop open in disbelief over the actual post-tax value of once-bragged-about brokerage accounts.
A house divided
But retirement and brokerage accounts can seem relatively straightforward when compared to the division of other assets. Probably the key asset that gray divorcers must divide is the value of the home.
What makes the home asset substantially more complex is that, often, one of the partners wants to stay put. This means they may have to give up their rights to other assets in return for a house that could experience a substantial decline in value in a relatively short period of time.
Emotional attachments to assets can be tricky. I worked with the family of a well-employed, recently divorced woman who bypassed her claim to all other marital assets in exchange for keeping the house, which, when appraised, had almost $1.6 million in equity. Even though she agreed to give up the balance of her 401(k), she was still only in her 50s, and with seemingly many more years left to work.
At the time of the divorce, it appeared she’d made out reasonably well. Unfortunately, in rapid succession she was forced to retire due to a health emergency that coincided with the onset of the 2008 real estate collapse. Eventually, with all her eggs in that one basket, she lost her only real asset to the bank via repossession.
But, conversely, throwing up your hands and agreeing to sell a house is not cheap, either. First, there are the repairs, upgrades and inspections, which often lead to still more repairs. Next, the cost of selling the home is going to be at least 6 to 7 percent of its value.
Then, afterward, whether you go on to buy or rent, the next financial shock to the system of a gray divorcer is the current cost of housing, which is almost certainly higher than when you purchased the home. This means your budget is going to be strained, and your settlement (or alimony, in certain cases) is going to quickly lose purchasing power.
Yet all of the above are just the basics. Other common financial sticking points for older divorcing couples include: the division of debt, the difficulties of splitting hedge funds or private equity holdings, premarital assets that have risen in value, comingled inheritances that are now marital property, pensions, collectibles, Social Security, and the fact that the person paying alimony might be forced to carry life insurance with a death benefit for the duration of his or her obligation to their former spouse.
Making it less costly
So, divorce is especially costly for people over 50. Is there a solution?
First, if you have no choice in the matter, and you absolutely must divorce, save time and money by knowing the precise value (and amounts) of every asset before meeting with attorneys. Meet with your Certified Financial Planner professional and your accountant, together with your spouse (if possible).
Another way to save substantial sums of money, if the split is amicable and the value of the assets are clear, is to steer negotiations and the division of assets and debts toward an experienced divorce mediator. There is no law that states you must hire a divorce attorney.
As illustrated above, hiring attorneys could result in 15 percent, or even more, of your assets unnecessarily going to legal fees. Just remember, you were married to your spouse for a long time, and if you extend the olive branch, and are fair, even if the marriage can’t be saved, consider it a business transaction.
That 15 percent savings may make a huge difference to your standard of living down the line.
Scott Hanson, CFP, is financial advisor and co-founder, Hanson McClain Advisors.
© 2017 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.