Dump your spouse, not your assets: 7 tips for surviving 'gray divorce'
For a midlife man or woman trapped in a failing marriage, a 'gray divorce' can bring liberation.
And financial ruin.
A man can expect his standard of living to decline by 21% after a gray divorce. A woman's standard of living will plunge by 45%. Both partners see their wealth decline by half.
Despite those perils, the divorce rate has doubled since 1990 for Americans over 55. Women are more likely to initiate a gray divorce, researchers say. They also tend to fare worse financially after the split.
Here are seven tips for managing your finances in a gray divorce, from AARP and other expert sources.
Don't expect the same lifestyle after a gray divorce
In a divorce, spouses typically split their assets. After the breakup, however, don't expect your monthly expenses to go down by half. Each partner will now likely face separate housing payments, utility bills and insurance premiums.
'It's really starting over with basic financial planning 101,' said Michelle Crumm, a certified financial planner in Ann Arbor, Michigan.
The lifestyle adjustment can be especially brutal for women, who often stay in the family home, but with a vastly diminished income.
'And they can't afford the house, and they can't afford the three pets that they have,' said Niv Persaud, a certified financial planner in Atlanta.
Don't get hung up on the family home
In a common gray divorce scenario, one partner keeps the home and gives up a trove of other assets to stay there.
That can be a mistake, experts say. Homes aren't the same as money in the bank. They're costly to maintain. The partner who gets the home can wind up house poor.
'A lot of times, people want to stay in the family home for sentimental reasons,' said George Mannes, executive editor at AARP The Magazine. 'But it can be a trap.'
Remember: You're still going to retire
Retirement savings loom large in gray divorces.
'Generally speaking, what most people have is retirement accounts and equity in their home,' said Monica Dwyer, a certified financial planner in West Chester, Ohio.
Just like the family home, retirement accounts 'tend to elicit strong emotions, particularly from the spouse whose name is on the account,' Diane Harris writes in an AARP report on gray divorce.
In divorce, a couple's collective retirement savings may be redistributed into equitable shares, one for each partner.
But how that works depends on where you live. In any of nine 'community property' states, the court splits the assets down the middle, according to Investopedia. In more numerous 'equitable distribution' states, the court divides the assets equitably, but not necessarily down the middle.
Financial planners strongly recommend that divorcing couples complete a qualified domestic relations order, or QDRO. It's a legal document that spells out how retirement savings are divided.
The form 'can be great,' Dwyer said, as a tool for dividing other assets in divorce. A spouse who receives funds under a QDRO generally doesn't pay a tax penalty for withdrawing them.
Don't assume all assets are equal
When divorcing spouses are deciding how to divvy up assets, a financial adviser can play a crucial role in divining what different assets are actually worth.
For example: $500,000 in a bank account is more valuable than the same amount in a 401(k). Why? Because the retirement savings have not yet been taxed as income, and withdrawing them early can trigger a penalty.
By the same token, $500,000 in a Roth IRA is worth 'a ton more' than the same amount in a traditional IRA, Crumm said: The Roth funds have already been taxed.
Diamonds are forever. Alimony is not.
Alimony is generally awarded in divorce to a spouse who earned less, to help them keep up the lifestyle they enjoyed during marriage.
Alimony can be awarded more or less permanently, or until a spouse dies or remarries. But that arrangement is becoming far less common, AARP reports.
While details vary from state to state, alimony 'is now typically designed to last just long enough for a lower-earning spouse to figure out how to become self-supporting,' Harris writes.
Crumm, the Michigan financial planner, counsels her clients to save 'a good chunk' of their alimony payments.
'Alimony probably doesn't last forever,' she said. 'The person who's receiving the alimony is at a disadvantage if they aren't planning well. When that ends, it's a cliff.'
Don't fight over prized possessions
Many divorcing couples wage protracted feuds over cherished possessions: Keeping a favorite painting for yourself, or punishing your ex-spouse by taking it away.
For a divorcing spouse who really wants to antagonize a sports fan, 'you go after the football tickets,' Crumm said. She has seen couples spar over seats at Michigan Wolverines games.
When spouses can't agree on who gets what, the judge decides, and that scenario often doesn't end well.
'You're punishing yourself when you go to court, really,' Dwyer said.
A better solution, she said, is to divide marital assets through mediation or 'collaborative law,' striving for a settlement outside of court.
Get on with your life
You aren't just divorcing your spouse: You're also divorcing yourself from their finances.
Take care to remove a former spouse from your financial accounts, experts say. Change beneficiary designations on investment accounts and insurance policies to ensure your ex doesn't inherit your stuff by mistake.
A divorcing spouse may need to rebuild their credit, especially if most accounts were in the ex's name.
'Be extra careful about credit cards that you have shared,' said Mannes of AARP. 'Make sure your spouse doesn't keep the account open.'
It's also a good idea to monitor your credit report, Dwyer said, to make sure a former partner's history doesn't muddy your own.
'Your ex does have your Social Security number,' she said. 'If we're talking about somebody who had a problem with gambling, if we're talking about somebody who has a spending problem, then you want to lock everything down, split everything up.'
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