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June 27, 2019 at 12:00 PM
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 by rejigging retirement plans, is a focus for Dennis Stearns, founder of fee-only Stearns Financial Group. The veteran advisor has worked in this area, which, he says, often gets “messy,” for a decade.
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.”
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.
How does gray divorce impact a couple’s retirement plan?
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.
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 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. 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?
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.
What happens with a couple’s retirement plan?
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 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?
