Divorce among older adults, referred to as “gray divorce,” has been on the rise in recent years. As societal norms evolve and life expectancy increases, more couples over 50 choose to separate.
Divorce is emotionally and financially grueling for everyone involved, and divorce at any age presents challenges. However, unlike younger couples who have time to rebuild assets, those divorcing later in life must manage their resources to ensure long-term financial security.
Division of assets and debts
Long-term marriages typically involve significant shared assets, including real estate and investments. Dividing these can be challenging, especially when determining liquidity and tax consequences. Working with a wealth advisor specializing in divorce and retirement planning can help you understand your finances and options when dividing assets. A Certified Divorce Financial Analyst (CDFA®) can help you create a settlement that aligns with your long-term financial needs. Keep in mind that although the financial division might not look ideal at the present, it might have long-term benefits. A wealth advisor can forecast how your settlement will look in the coming years.
Splitting retirement account assets
The process for dividing retirement account assets during a divorce varies based on the type of account. Retirement plans governed by the Employee Retirement Income Security Act (ERISA), such as 401(k) plans and pensions, require a qualified domestic relations order (QDRO) to determine how the assets will be distributed. A QDRO, issued by a court or state agency, grants a divorcing spouse the right to receive part or all of the account owner’s pension or defined contribution plan.
There are two primary ways a QDRO can divide assets. A separate interest QDRO allows the nonparticipating spouse to access benefits independently, even if the account owner has not yet retired. In contrast, a shared-interest QDRO entitles the nonparticipating spouse – referred to as the alternate payee – to receive a portion of the retirement benefits only after the account owner begins receiving distributions. For example, under this method, an ex-spouse would have to wait until the plan owner retires to start receiving pension payments.
After both parties agree to the QDRO terms, the account owner submits the order to the plan administrator, and the court must certify it before implementation. The process can take several months, so consulting both the plan administrator and a divorce attorney is advisable to ensure a smooth division of retirement assets.
IRAs, however, do not require a QDRO for division. Instead, a divorce decree is needed. If transferring funds from one spouse’s IRA to the other’s, using a trustee-to-trustee transfer is recommended to avoid early withdrawal penalties and tax liabilities.
| Important note:
If you’re considering tapping into your IRA before reaching the age of 59 ½, it’s important to be aware of the 10% early withdrawal penalty imposed by the IRS. However, there’s a provision known as Rule 72(t) that permits penalty-free early withdrawals from retirement accounts, such as IRAs, 401(k)s, and 403(b)s. To qualify, you must commit to taking “substantially equal periodic payments” (SEPPs) based on your life expectancy. These payments must continue for at least five years or until you reach age 59 ½, whichever is longer.1 |
Once the divorce is finalized, it’s important to update beneficiary designations on retirement, bank, and brokerage accounts, as well as insurance policies, to reflect the changes in financial planning.
Consider alimony and child support
Even later in life, divorcing couples may need to address alimony and child support, and these financial obligations don’t always end when children reach adulthood. In some cases, support agreements extend to cover higher education costs, such as college tuition. Because financial situations can change, particularly for those with fluctuating incomes, some divorce agreements include provisions that allow for adjustments based on income variations. It’s important to negotiate terms that account for immediate and long-term financial responsibilities. Consulting a wealth advisor can help ensure these agreements are structured to meet both parties’ needs over time.
The impact on Social Security benefits and healthcare costs
Divorce can also affect retirement income, particularly Social Security benefits. If one spouse earned significantly less than the other, they may be eligible to receive benefits based on their ex-spouse’s earnings record. This can provide up to 50% of the former spouse’s benefit amount, though the exact percentage depends on when the claim is made. Those who apply before reaching full retirement age (66 to 67, depending on birth year) may receive a reduced amount.
To qualify for Social Security benefits based on an ex-spouse’s record, the marriage must have lasted at least 10 years, and the person making the claim must be at least 62 years old and currently unmarried. If the ex-spouse has not yet applied for benefits but is eligible, benefits can still be claimed if the divorce occurred at least two years prior. Importantly, claiming benefits on a former spouse’s record does not affect the benefits they or their current spouse receive. For more details on eligibility and claiming options, individuals should contact Social Security.
Gray divorce can affect healthcare expenses. One spouse may lose access to insurance benefits previously provided by their partner, which can be a significant concern for older adults with increased health concerns.
| Did you know?
After a gray divorce, a man’s standard of living declines by 21% – but a woman’s drops by an average of 41-45%, according to a study published by the U.S. Government Accountability Office.2 More information on how gray divorce can impact women can be found here. |
Lifestyle adjustments
Beyond finances, gray divorce often brings emotional and social shifts that require careful planning, including:
- Emotional well-being: Ending a decades-long marriage can be emotionally overwhelming. Feelings of isolation and uncertainty are common, making therapy or support groups valuable resources.
- Social connections: Divorcing later in life can disrupt long-standing social circles. Maintaining and rebuilding friendships are essential for emotional health and stability.
- Housing and living arrangements: Many couples must decide whether to sell the family home, relocate, or downsize, balancing financial needs with lifestyle preferences.
Gray divorce is becoming a reality for more couples. While the financial and emotional impacts can be significant, proper planning and professional guidance can help individuals move forward with confidence. For more information, visit our library of related articles and contact your wealth advisor. If you’re not a Mercer Advisors client and would like to learn more, let’s talk.
1 “Substantially equal periodic payments.” IRS, July 22, 2024.
2 Gold Buscho, Ph.D., Ann. “How Women Over 50 Can Recover Financially from a Divorce.” Psychology Today, Nov. 29, 2023.
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