Divorce Can Derail Otherwise Solid Retirement Plans

Art by Jackson Joyce

The rise of “gray divorce” is dramatically affecting some couples’ retirement and estate planning efforts, according to a survey recently conducted by TD Wealth Management Services.

The report is based on an in-person survey conducted during the annual Heckerling Institute on Estate Planning event, which took place in mid-January. As detailed by TD Wealth analysts, this year’s survey of estate planners and attorneys explored the increasing rate of divorce for those over 50. In addition to finding that divorce is challenging more couples in their pre-retirement years, the survey also cites challenges tied to prolonged life expectancy and rising health care costs.

“This upward trend around couples divorcing over the age of 50 has created a recent swirl among the estate planning industry,” says Ray Radigan, head of private trust at TD Wealth. “Gray divorce is adding another layer of complexity to the estate planning process that already arises with blended families, designation of heirs and the ever-changing domestic structures.”

Radigan says these factors mean it is more important than ever for financial professionals to proactively review and discuss the estate plans and retirement ambitions of clients and their families—and to do so on an ongoing basis. This suggestion is also buoyed by the fact that the recently enacted Setting Every Community Up for Retirement Enhancement (SECURE) Act also made important changes to the treatment of certain trust arrangements that may feature into clients’ estate plans.

Against this backdrop, the TD Wealth report finds, 39% of survey respondents identified “retirement planning and funding” as a “highly impacted” estate planning factor for those divorcing over the age of 50. Later-in-life divorce is also having an impact on determining who will be responsible for enacting power of attorney, the survey shows, and on determining appropriate Social Security claiming strategies and the drafting wills. All of these are areas where financial advisers’ expertise can be helpful.

Costly for Everyone

Divorce is very costly for individuals and, in most cases, reduces people’s retirement readiness, according to the Center for Retirement Research at Boston College. The center’s National Retirement Risk Index (NRRI) in 2019 found that 53% of households that have gone through a divorce are at financial risk in retirement, compared with 48% of households that have not experienced a divorce.

Further, the net financial wealth of non-divorced households is $132,000, about 30% higher than the $101,000 held by divorced households. The center says that, overall, divorce raises the possibility of being at risk by 7 percentage points. For couples with a previously divorced spouse, the risk is raised by 9 percentage points.

Other costly effects of a divorce, the center says, include short-term legal fees. Divorce also frequently results in the sale of the house, which not only involves transaction costs but also can occur at a suboptimal time in the housing market.

Often, divorce requires that financial and retirement wealth be divided between two new households. If financial assets can be divided without being sold, divorce may not reduce total wealth. But if assets are sold, the timing may be bad and sales can involve transaction costs.

Divorce also increases daily living expenses because the divorced couple now occupy two households. They also lose the federal income tax break that married couples receive. In addition, divorced women often have children to look after, which can impede their ability to earn a living. And divorced men often are required to provide financial support to their ex-spouse while also paying the bills for a new family.

The Need for Advice  

Among the findings reported in Allianz Life’s 2019 Women, Money and Power Study is the fact that financial confidence is actually on the rise for divorced women, who say they are feeling more financially secure (65% in 2019 versus 50% in 2016).

Interestingly, divorced women report feeling “increasingly on track financially” the longer they have been divorced. As such, women who have been divorced for more than 10 years say they have a better understanding of financial products they own, are better about setting and achieving financial goals, and are better about saving for long-term goals compared with women who have been divorced for less time.

Overall, only a quarter of women in the study say they currently have a financial professional, which is down from 30% in a similar 2016 study. Of those who are working with one, over half (60%) say their financial professional treats their spouse/partner as the lead decision maker, which may cause women to feel less independent (81% in 2019 versus 87% in 2016) or confident (83% in 2019 versus 91% in 2016) as a result of working with a financial professional.

“Women need to be empowered in all aspects of their lives, especially when it comes to finances,” says Lynn Johnson, vice president of financial planning strategies at Allianz Life. “They can start this process by working to educate themselves more on financial topics and products, by not being afraid to broach the oft-thought taboo topic of money, and seeking out a financial professional who understands some of the unique financial challenges that women face today.”