The stakes are high for older couples negotiating the terms of divorce. Take some proactive steps before you sign on the dotted line to protect your financial future.
Going through a divorce can be emotionally and financially draining no matter your age.
People tend to worry more about young couples with small children and their security. However, divorce can be just as tough on older couples â€” especially if theyâ€™ve been married for years and have tightly tied together their assets and their future plans.
Although divorce rates are falling for Americans overall, â€śgray divorceâ€ť is on the rise. According to the Pew Research Center, among U.S. adults 50 and older, the divorce rate has roughly doubled since the 1990s. Though second marriages and shorter marriages are most at risk, according to Pew, â€śa significant share of gray divorces do occur among couples who have been married for 30 years or more.â€ť
Splitting your assets and starting over takes courage, patience and research. A late-in-life divorce can endanger retirement success for both spouses, who may end up living on half the income they expected but with many of the same expenses.
Here are six things to consider if youâ€™re navigating the end of a marriage:
This is a vulnerable time, and itâ€™s easy to rationalize the choices you make. You may want to do something that makes you feel better or more stable, and you may feel you have to maintain a certain faĂ§ade for your social circle. Itâ€™s not uncommon to see people go out and spend money â€” sometimes before the divorce is even final â€” on a new home or other things they canâ€™t afford.
The best way to feel safe and stable is to remain cautious with your spending. Take the time to plan out what youâ€™ll need today, 10 years from now and throughout your retirement before you go shopping for your new life.
Donâ€™t let your soon-to-be ex walk out the door without getting copies of past tax returns (at least three yearsâ€™ worth), receipts that will apply to your current taxes, bank and credit card statements, insurance documents, retirement account statements, car registration paperwork, etc.
Know whatâ€™s in your name, your spouseâ€™s name and whatâ€™s in both your names. Do a credit check on yourself and your spouse, and make sure you know of any debts that are hanging out there. Donâ€™t just trust; do your homework.
Most people think about contacting a lawyer right away, but a financial adviser who is a fiduciary can help you map out what youâ€™ll need for the future and how to best meet your goals given the changes in your life. This process can be painful, but it also may be a relief.
Look at it as an opportunity to get what you really want. Perhaps you wanted to downsize or to relocate and your ex didnâ€™t. Maybe you had different ideas about how much risk to take with your investments. You should meet with your adviser before and after your settlement negotiations to determine how best to put your new plan into action.
Itâ€™s essential to understand what you have in pretax and after-tax assets and how that will affect what youâ€™ll owe Uncle Sam through the years. Project what your tax bracket (and your spouseâ€™s) will be once youâ€™re divorced. Remember, your filing status is going to change: If on the last day of the year you are unmarried or legally separated from your spouse, youâ€™ll be filing as single. This means your standard deduction will be cut in half ($12,000 instead of $24,000 in 2018), and you may land in a higher tax bracket.
So, for example, it may make sense for the lower earner to take any pretax investments (IRAs, etc.) in the settlement, because that personâ€™s future tax bill will be lower, assuming they wonâ€™t need income from it before age 59Â˝. Or you may decide the lower earner, who may not pay capital gains depending on what tax bracket they are in, should take any highly appreciated holdings. If it looks as if your retirement income (Social Security, pensions, other accounts) will push you into a higher tax bracket in the future, talk to your financial professional about converting some of your IRA or defined contribution plan funds to a Roth account now to lower the tax burden later.
When youâ€™re on your own, youâ€™ll want to make the most of every penny. Here are a few options to consider.
An insurance policy is a valuable, but often overlooked, consideration when negotiating a settlement. Only the policy owner can access the cash value in a permanent life insurance policy or make or change beneficiary designations. If youâ€™re a lower earner who is receiving spousal support, you may wish to own a life insurance policy on the higher earner, even after the divorce, to protect that income stream.
Itâ€™s tempting to put off dealing with financial issues when there are so many other challenges during a divorce, but the decisions you make now could affect you for the rest of your life. Get the edge in negotiations by being prepared and confident. Your future security depends on it.
Kim Franke-Folstad contributed to this article.
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