‘Silver’ Divorce Puts Strain On Retirement Income

The original source of this article is available on Forbes.com here

Jamie Hopkins, CONTRIBUTOR
I cover retirement income planning, retirement, and other legal issues
Opinions expressed by Forbes Contributors are their own.

A common misconception about marriage in the U.S. is that millennials have a higher divorce rate than previous generations. In fact, millennials are actually divorcing at much lower rates than those of similar ages in the 1970s and 1980s. In reality, it was the baby boomers reaching adulthood that caused a boom in divorce rates. Divorce rates are increasing for the baby boomer cohort as they are now entering retirement. This increase in senior, or “silver,” divorce is creating a whole new set of financial and retirement challenges.

Why now?

When discussing divorce after age 50, there are three special retirement concerns that must be examined. First, by age 50 or later the couple has likely accumulated some wealth, making the disposition and splitting of assets a primary function of divorce. Second, the couple must decide what to do with the home since the home is the largest asset for the average American couple in their 50s or 60s. Third, retirement income sources need to be reviewed, as many couples plan to have the income from both spouses in retirement. However, a divorce might leave an individual with only a spousal benefit from Social Security, creating a large retirement income shortfall. While family dynamics are still important with a divorce at any age, custody of children is less likely to be a predominant issue with a silver divorce, as the children are generally older and living on their own.

Division of marital assets can be very complicated and contentious during a divorce. Generally, state law will control the splitting of assets and will try to obtain a result that is deemed to be equitable or fair by the court. This can often result in a close to even splitting of assets and even some continued support obligations. However, once a spouse retires, that support obligation can often be reduced or eliminated. The division of assets later in life will often include retirement savings in a 401(k) account or an IRA. While 401(k) accounts and IRAs often have special creditor and alienation provisions, they can be divided by a court and required to be paid out to a spouse under a qualified domestic relations order.

“A reverse mortgage doesn’t require monthly payments and repayment isn’t due until the last homeowner leaves the home. This can remove one burden from the divorce process that is already filled with both financial and emotional stress.”

While dividing a 401(k) or IRA is very important, the largest asset for the American couple is still the home. Splitting up a home also creates unique challenges because the home provides housing services. It is where the couple lives and is likely where at least one of the two individuals would like to continue to live. According to Barry H. Sacks, Ph.D., J.D., a member of The American College’s Longevity Funding Taskforce, an often overlooked and underutilized tool for dividing assets in silver divorces is the reverse mortgage. A reverse mortgage can be used to provide the liquidity needed to help divide the value of the home, paying out the spouse who wants the money while allowing the other spouse to remain in the home without making any mortgage payments. Monthly mortgage payments could be a huge strain on his or her retirement income each month.

“Traditionally, if one spouse wants to stay in the home after a divorce they would have to refinance the mortgage to take the equity they owe the other spouse out of the home – although it would leave the spouse remaining in the home with added mortgage payments,” said Gregg Smith, President and COO of One Reverse Mortgage. “A reverse mortgage doesn’t require monthly payments and repayment isn’t due until the last homeowner leaves the home. This can remove one burden from the divorce process that is already filled with both financial and emotional stress.”   However, remember that reverse mortgages can only be used for homeowners age 62 or older, so they are uniquely available for many silver divorce situations, but not for younger people divorcing.

When a couple splits up closer to retirement, the divorce can have dire consequences for their retirement income, as the total amount of retirement income will likely stay the same, but each spouse will likely see higher individual retirement costs. In some cases, a silver divorce might require the individuals to consider working longer and delaying retirement. However, if delayed retirement is not an option, determining how to best use the available retirement income sources is crucial. This means making smart Social Security claiming decisions and taking full advantage of potential income sources like the home. For example, Dr. Sacks points out that a reverse mortgage can be an effective way to help generate retirement income, especially in divorce situations where dividing a home and a 401(k) account between two people might not be the optimal solution. Instead, Sacks suggests that in those situations one spouse could receive the home and enter into a reverse mortgage that pays income for as long as he or she lives in the home, and the other spouse can take the 401(k) account or the IRA.

With a growing number of silver divorces comes a new challenge for retirement income planning. Dividing wealth is not just about accumulation anymore, and it must be done in a manner that creates sustainable retirement income for both ex-spouses. With the home being the largest asset of an average 65-year-old American couple, it must be considered as part of both the overall asset division and as a retirement income tool. Although reverse mortgages still have some residual negative connotation, they deserve a thoughtful second look, especially for silver divorces in which they can be an effective tool when used correctly.

Follow me on twitter at @RetirementRisks and check out my retirement ebook on Amazon here.

A PDF of this post is available here