Grey divorce is a difficult life transition and in order for this transition to be successful, it requires time, self-care, good planning and willingness to adapt.
In the last 25 years, grey divorce – people ending a long-lasting marriage after age 50, has been on the rise and now accounts for one out of every four divorces in the United States (1). Interestingly, two thirds of late-life divorces are initiated by women. Researchers think that women of baby boomer generation have less tolerance for unhappy marriages as they’ve gained more financial autonomy and independence, put more priority on self-fulfillment, and expect a longer lifespan than previous generations.
Regardless of the reasons behind this phenomenon, for spouses who spent decades together building their family and wealth, the transition from married to single status in later life have its own unique challenges. The couple no longer needs to fight for custody or child support, but they have less time to recover from the financial setback resulting from divorce. They worry about having enough to retire and how to take care of themselves when they are older and living alone. Therefore, the biggest question on their mind is: Am I going to be OK financially? To help them navigate through this transition, let’s explore the important financial considerations during and after a grey divorce:
During Divorce – Settlement Stage:
Ideally, your team of advisors during the settlement stage should include a financial expert who is experienced with divorce settlement issues and can guide you through the process with eyes on financial details. Here’re just a few common and complex financial decisions for grey divorcees:
Family Home – keep it or sell it?
It is natural to be emotionally attached to a family home you’ve lived in for a long time and want to hold onto for yourself or even next generations. The residence also represents the lifestyle and social identity you are accustomed to.
But before you are fixated on this decision, make sure you understand the long-term financial impact of keeping a property that is illiquid, does not generate any income but is costly to maintain.
If there is a large capital gain on the house and you are forced to sell in the future on your own, you would lose half of the gain exclusion amount ($250,000) and pay a larger tax bill. Bottom line: you should be open to different residence options and think twice before asking for the family home in exchange for other assets.
Disparity in earning power and potential – alimony or a larger property settlement?
If you are a non-working or low-earning spouse in a long-term marriage, you should be able to get a larger property settlement, or alimony, or both from the high-earning spouse, in order to make the settlement more equitable. While property settlement is permanent and inheritable, alimony is often modifiable, conditional (no remarriage, for example) and ceases when the payer dies. If you count on a life-long alimony for your financial security, find out what happens if the paying party dies, becomes disabled or retires? It’s a good idea to explore life and/or disability insurance on the paying spouse to guarantee alimony payments before the divorce is final.
Privately-held small business – how to settle?
A small family business or professional practice run by one spouse is very tricky to settle because the market price is not readily available and the parties have inherent conflict over what it is worth. You need to agree on the valuation method and obtain an independent business appraisal but even with that, the operator-spouse may have little liquidity or borrowing capacity to buy out the uninvolved spouse. The most rational approach is to be flexible and do what’s the best for the business instead of forcing a sale or division, consider a fair share of business income and a lump-sum payout upon any future liquidation event.
After Divorce – Passage Stage before New Normal:
For divorcees, the end of a marriage is just the beginning of a transition stage called “passage”. During this stage, your advisory team may have left, but you can still experience an enormous amount of emotional baggage, such as anger, fear, grief and even low self-esteem or depression, while adapting to the drastic changes in your personal, financial and social life. It’s easy to focus on what’s lost instead of what you have and how you are going to make the best use of it.
Immediately after divorce, there are essential decisions to make and actions to take. The details can easily become overwhelming: new tax payments; investment of the settlement money; re-titling assets and debts; change of beneficiaries; drafting new legal documents; reevaluation of your insurance needs; understanding how social security benefits work and the optimal timing to take them…It’s time for you to put together a new advisory team who can have a longer-term working relationship with you and help you prioritize and put your financial house in order over time.
It’s equally important to be aware of the potential financial pitfall that newly divorced are vulnerable to:
Holding onto the former lifestyle for too long
The same financial resources used to support one household now need to support two. It’s hard to make difficult decisions and accept compromises in the beginning. But the sooner you are able to adjust your lifestyle to live within your means, the earlier you can move forward with confidence.
Putting others’ interests above yours
Divorced parents tend to get closer to their children and are more willing to use settlement money to support them such as education, wedding, house down payment, etc. It is wise to set limits on how much you give and put off major gifts until you are clear about where you stand financially.
Sudden Wealth Syndrome
A lump-sum divorce settlement may feel like a financial windfall and opens up the temptation for shopping sprees and making risky investments which often lead to disastrous results. This is especially true for those who have no prior knowledge and experience around managing money.
Grey divorce is a difficult life transition and in order for this transition to be successful, it requires time, self-care, good planning and willingness to adapt. At Silver Oak, we work closely with divorced clients and their team of advisors, to help them understand where they stand financially, identify and prioritize key financial decisions and actions, and maintain a sustainable level of spending. The goal is to keep them in a financial safe zone while they explore new identities and possibilities. As they successfully move out of the passage stage and move into a new normal where they no longer label themselves as divorcees but are ready to dream again, we then help them create their vision for thw future and have a financial roadmap to achieve it.
Silver Oak advisors are all trained in the brain sciences behind life transitions, with tools and processes to guide someone through the most difficult life passages. We have earned certification as Certified Financial Transitionist ™ (CFT™) through the Sudden Money® Institute. To help divorcees get started, we’d like to offer a complimentary copy of “Impact of Divorce – What has changed?” as a guide for discussion points with your advisors, provided by Sudden Money® Institute.
Linda Cao, CFP®, is Wealth Advisor at Silver Oak. She specializes in working with women-in-transition and retirement planning.