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When Clients Divorce After 50, How Advisors Can Rescue Retirement Plans

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It’s disconcerting, if not shocking, that divorce among people age 50 and older is sweeping the nation. How financial advisors can help clients navigate the epidemic of so-called gray divorce, especially in rejigging retirement plans, is the heart of a ThinkAdvisor interview with Dennis Stearns, founder of fee only Stearns Financial Group. The veteran advisor has focused on the money issues of gray divorce — which, he says, often get “messy” — for a decade.

Leading the upsurge are fed-up baby boomer wives in grin-and-bear-it marriages — often decades-long — who are hoping to carve out more satisfying lives in their remaining years, which could well be decades long, too.

Like the two other biggest threats to financial independence — inability to meet expenses a life-changing event may cause and making major behavioral investing mistakes — divorce typically wreaks havoc with a couple’s finances. With gray divorce, a carefully crafted retirement plan usually must be recast to create two separate plans.

In the interview, Stearns, whose firm, based in Greensboro, North Carolina, manages about $1 billion, discusses how he helps clients find the right financial solutions. The gray divorce expert is author of “Fourth Quarter Fumbles: How Successful People Avoid Critical Mistakes Later in Life” (BookBaby 2018).

Paradoxically, while the divorce rate of younger couples has dropped in recent years, since 1990 the rate of folks 50 and over has doubled, according to the National Center for Health Statistics and the U.S. Census Bureau. For ages 65 and older, the rate has approximately tripled over the same period.

Baby boomer wives as well as women born a few years earlier — known, like men, as war babies — who are unhappy in their marriages now have impetus to divorce even in marriages of 30 years or more because of increased longevity and the resultant ability to remain longer as earners in the labor force.

But there are plenty of pitfalls to gray divorce, especially for women; and they’re explored in a book authored by Stearns’ partner and senior vice president Haleh Moddasser, “Gray Divorce, Silver Linings” (Bookbaby 2017).

The gray divorce epidemic also can be partially explained by the fact that many of these splits arise in second marriages, known to be less stable than first unions. Still, more than 50% of gray divorces occur in first marriages, according to papers written by sociologists Susan L. Brown and I-Fen Lin, published in the Journals of Gerontology.

Financial advisors can show their value, to be sure, by helping to guide clients through the financial challenges of gray divorce. Stearns discusses these and apprises readers of the skills that takes.

ThinkAdvisor recently interviewed Stearns, on the phone from Greensboro. A second office for his practice operates in Chapel Hill. Fun fact: A former expert chess player, Stearns was on one of the winningest chess teams in U.S. history. In the interview, he reveals his strategy for gray divorce financial planning in the thick of often “tricky” situations.

Here are highlights of our conversation:

THINKADVISOR: How does gray divorce impact a couple’s retirement plan?

DENNIS STEARNS: Unless you’re Jeff Bezos, getting divorced will be a major economic problem. Divorce is one of the top three threats to financial independence. The others are not having a handle on living expenses when circumstances change and behavioral finance traps around investment portfolios.

How prevalent is gray divorce?

It’s an exploding trend. Probably the No. 1 reason is that more women than men are initiating it, according to the statistics. They’re mainly baby boomers and recognize that they’ll both live longer [than previous generations], and the wife doesn’t want to be a caregiver to somebody they don’t care that much about.

So is this only about younger boomers?

No. A 74-year-old woman recently walked into our office and said, ”I have 10 or 20 good years ahead of me. The guy I’m married to is OK, but he’s probably a 4 on a 10-scale. Frankly, I don’t want to be his caregiver when he’s starting to go downhill because he’ll be even more of a pain in the rear end.” We’ve heard variations on that story a lot.

Why is gray divorce, especially, a threat to financial independence?

Later in life there’s less ability on the part of the surviving spouse — most often the wife — to make up ground concerning money. She may have to delay retirement. Another major issue is that gray divorce is often followed by depression, mostly suffered by the [ex-] wives. It’s a calamity from both the financial and psychological viewpoints.

At what juncture should these couples start to get financial advice about divorcing?

The spouse who’s less well-off income-wise or career-wise should get advice as early as possible.

Should she or he see the advisor they’ve had as a couple or find a different FA right away?

That’s one of the messy pieces. If she talks to the advisor they both have, that’s probably creating a conflict or ethical challenge; so the advisor may end up saying, “I’ll only represent you” or “I’ll only represent your husband.” Our advice, therefore, is to find a third-party financial advisor.

Have you ever encountered a situation where an FA represented both the wife and the husband?

Yes. A few years ago, we were brought in to sort out a case in which a Merrill Lynch advisor was trying to play both sides. But he was secretly favoring the husband. That epitomizes the problem with the divorce process: The wife was ready to give in and do anything she could to get on with her life. But the things her husband had done were so egregious, including hiding money and undervaluing business interests.

What happened, then?

We and the wife’s legal counsel helped her fight on. It ended up like a game of chicken. The husband knew he’d been caught with the Merrill Lynch guy. Ultimately, the husband acquiesced and paid the wife a lot more money in alimony and assets. There was a happy ending, but it could just as easily have been a disaster.

I imagine that many women experiencing something similar decide, “This is horrible. I think I’ll stay with my husband and hire a nurse.”

Typically, by the time we see people, they’ve gotten so fed up they’ll do anything to go through the process. But you’re right: Usually halfway through, many of them are second-guessing whether it’s even worth it because it can be pretty messy.

What happens with a couple’s retirement plan? Divorce will upset it, I assume.

The couple [probably] has to create two new separate retirement plans. Generally, you’re dividing the assets down the middle, and the couple’s retirement plan will typically be divided 50%/50% too. Some of that is dependent on the state people live in; for example, whether or not it’s a 50%/50% community property state. In “equitable distribution” states, the general rule is a 50%/50% division of assets acquired after the marriage. Usually for the spouse not in a 401(k) plan, there’s a rollover to an IRA.

What issues about assets are most challenging?

This is where it gets very tricky: If an individual had an asset when they came into the marriage and keeps it completely separate, that asset and its growth may not be included in the 50%/50% split.

What about the tax aspect of gray divorce?

In cases where one spouse is in a lower tax bracket, his or her having more of the retirement plan and less of other assets makes sense. But the tax piece is often where the less [financially] sophisticated spouse gets taken advantage of because they don’t understand pre-tax vs. after-tax money.

Have the new tax laws complicated things?

Yes. For one, the deduction of alimony [for the spouse who pays it] has gone away, and that has changed the negotiating tactics. You need to have a good CPA in the mix.

What if, in addition to a 401(k) plan, the couple has a portfolio of investments?

If they’ve built it up during the marriage, generally it will be divided 50%/50%. But it can get messy when, as I’ve mentioned, one spouse tries to prove that some of those assets came prior to the marriage and should be on their side of the ledger.

This is where an FA can be quite helpful, right?

There’s some really great planning that can be done, though a lot of family law attorneys are reticent to go in that direction because you’re getting outside the bright lines of the law. So you get a collision of what makes sense from a financial viewpoint versus what makes sense from a legal viewpoint.

What aspect of Social Security needs to be addressed in gray divorce?

Social Security has to be factored into the whole negotiation process because negotiating things piecemeal usually ends up with a bad result. It has to be done holistically where you’re thinking about all the different facets from a fairness and end-game viewpoint.

What if one spouse — usually the wife — has never worked during the marriage?

The very tricky thing in a gray divorce is that the husband may be closer to the end of his career, and therefore the negotiated alimony may become shorter. That makes it harder for the wife to get back on her feet. These negotiations can be very difficult. We had one recent case where the husband argued in mediation that he had only about three or four good years ahead of him, and so the alimony should be for only three or four years and then cut off completely.

Can a prenuptial agreement, including the retirement plan, make gray divorce easier?

In many cases, we’re not even sure if that’s advisable. This is where you get into the art and science of financial planning. Often a pre-nup taints the relationship to begin with. If you’re being hardnosed that you have a separate pot of money the couple isn’t going to use because “You [the other spouse] might leave me some day,” that doesn’t build a healthy foundation for a long-term relationship.

So, then, co-mingling assets is a good thing — a nice thing — for a couple to do?

You do a lot of things in the early years for love. But I can’t tell you how many times I’ve heard from clients: “I wish I hadn’t done that.”

Suppose the couple owns a business together?

That’s usually way messier than anything I’ve already described. Some businesses have a good buy-sell agreement about who will buy out whom. But, typically, with married couples, it gets back to [in early marriage]: “We’re in love. So what could happen?”

How is the business split-up resolved when they have no such agreement?

Many times the spouse who’s staying in the business wants to value it as low as possible and the one leaving wants to value it as high as possible. It gets into a court situation, and they duke it out over the valuation.

Where does life insurance come into the gray divorce picture?

Usually the spouse that’s less well off from an income viewpoint retains some life insurance on the person who’s making more income. That’s an offset to future alimony, generally. So if the husband dies, the wife gets paid a lump sum in lieu of the rest of the years of alimony. In cases of a business buyout, they may also get the life insurance.

Doesn’t collaborative divorce make ending the marriage somewhat easier?

That’s a belief because only one lawyer is used instead of two. But when you get to about $1 million or more of assets, money usually becomes such a big issue that the collaborative process breaks down into the traditional two-lawyer [situation]. And then that gets out of control even if both sides say, “We want this to be amicable,” because the lawyers drive in a different direction.

Any other advice to FAs about working with gray divorce clients?

This isn’t for every advisor, but it’s something most advisors need to know more about just for giving general advice. Those who want to go deeper into the gray divorce space should recognize that they have to be able to deal with clients who are in a highly fragile emotional state. If that’s not their ideal client, they may not be the ideal advisor for that individual.

What traits and skills does the FA need to work effectively with such clients?

A combination of very strong empathy but also the ability to maintain professional decorum because you’ll get into situations like the one I described where the spouse was ready to fold her cards and give in. If the advisor says, “Let’s think about having Plans A, B and C,” but doesn’t deliver that in the right way, it might hurt the spouse’s emotional state more than help it.

How should the FA go about that, then?

The ideal advisor for the gray divorce niche should be able to figure out which side is needed: the analytic side or the empathy-and-professional decorum side. They need good skill sets for both.

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