Divorce can happen at any stage in life, and each stage brings its own special set of challenges. Divorcing young with a family creates years of financial obligations and working with a former spouse on parenting for many years. Divorcing midlife with the children nearly grown shifts the burden to going back to work for some parents. And divorcing closer to retirement poses some of the most significant challenges to finances, as described in this wonderful article in Businessweek.
As spouses approach retirement, divorce hurts financially because of the singular reality of low-or-no-employment and the fixed income scenario.
As spouses near retirement, the odds that each will continue to work diminishes greatly, and if one has not worked in some time, the chance of any truly gainful employment is low. So, if these spouses decide to divorce, they are looking at a zero-sum game: no chance for growing new employment or reaping rewards of future investments. The net worth of the couple will probably not get any higher, nor the earning capacity.
At the same time, the cost of living for post-retirement individuals expands, particularly as a share of gross income. The chance of illness creating a large health-care debt increases while the chance of landing affordable long-term care insurance decreases. Medications can be costly, and private insurance to cover what Medicare will not is yet another expense.
Given these realities, when spouses at this age do decide to divorce, they really suffer financially because two people living together in one household can do much more on the same funds than two people in two separate households. As a result, both spouses see a decrease in their standard of living because they are taking the net worth, splitting it and using it to sustain two separate lives. It is as if you just took your annual income and cut it in half. And the lesser earning spouse, i.e. the one with fewer benefits or prospects, cannot hope for spousal support from the other spouse if that spouse suffers from the same constraints.
So, what should people of a certain age do about divorce?
Plan in advance. Once a couple reaches age fifty, they should sit down with a financial planner and examine how to structure funds to maximize their individual security in the event of a divorce – including maintaining health, life and disability policies. After the couple has this financial plan, they should memorialize it in a postnuptial agreement.
These types of talks may seem grim and anything but romantic, but they are highly realistic and practical and will only protect both parties in the event of divorce.
If you have questions about financial considerations in divorce at retirement, contact us – we can help.