Ending a marriage has drastic financial implications, regardless of the spouses’ ages. But the longer the marriage, the more complicated a divorce becomes. In many cases of so-called gray divorce, you must address dividing retirement benefits, Social Security, and other specific financial issues.
What Is Gray Divorce?
Gray divorce generally refers to spouses over the age of 50 who end their marriage. The divorce rate for couples over 50 has more than doubled over the last 20 years. Roughly one in four divorces involve couples aged 50 and older, while approximately one in ten involve couples aged 65 and older.
Is Gray Divorce Different?
The same laws govern divorce at any age. However, couples approaching retirement face several unique potential pitfalls and challenges. Here are some common mistakes to avoid in divorce as you near retirement.
What Retirement Benefits Are You Entitled To?
Throughout a marriage, spouses’ lives intertwine. As time passes by, you become eligible for certain retirement benefits based on your spouse.
- For unions lasting over ten years, you may be eligible to receive Social Security based on your ex’s work history.
- If your spouse served in the military, you are entitled to collect a portion of any pension.
A number of such potential allowances exist, but if you’re not aware of them, you may leave money on the table.
Social Security Eligibility After Divorce
Being married for a minimum of ten years entitles you to half of your spouse’s Social Security benefits after divorce. That’s great, but, as with most things involving the government, it’s not that simple.
You must be at least 62 years old and currently unmarried.
Whether or not your ex remarries is beside the point. However, your ex must also be eligible for Social Security in the first place. If you hope to collect based on your ex’s work history, any benefit must be larger than your own.
Simply put, you get one or the other, not both. What you receive also depends on when you take them—if you wait until full retirement age, you will receive a higher amount.
Related Reading: 11 Strategies to Know Before Filing for Divorce
Common Financial Mistakes in Gray Divorce
Even beyond dividing retirement benefits, gray divorce presents several other unique and challenging concerns. To achieve the best settlement, it is essential to be aware of these and other potential issues.
Don’t Automatically Choose The House Over Other Assets
In many divorces, a shared home is often the most significant asset to be divided between the parties. It makes sense. This is, for most of us, the most expensive, significant thing we’ll ever buy. Also, it’s where we’ve lived for years, it’s our home. As a result, many people fight tooth and nail to keep the house.
However, this may not always be the best financial choice. Houses cost money to maintain and are often difficult to liquidate, depending on your market.
A more prudent move may be to withdraw retirement funds and let your spouse retain the house. Another option is to sell the house and split the proceeds. That’s money you can use to bolster your retirement savings.
Related Reading: A House Divided: Splitting Up the Home in Divorce
Don’t Ignore Tax Implications Of Retirement Benefits
Ignore the tax implications of retirement benefits divided in divorce at your peril. You may think you’re getting one amount but wind up with something very different.
It’s important to know the differences between things like a traditional 401(k) or IRA versus a Roth IRA or Roth 401(k). In this instance, one is taxable, one is not.
When you withdraw money from a standard IRA or 401(k), the IRS taxes you when you remove money. So, if you have a $100,000 401(k), you wind up with substantially less.
On the other hand, with a Roth IRA, you pay the taxes when the money is deposited into the account, not when you make a withdrawal. The money is taxed ahead of time.
On paper, a $200,000 IRA and a $200,000 Roth IRA may look the same, but in practice, they’re pretty different. Knowing such details may give you a leg up.
Related Reading: Can You File For Bankruptcy During a Divorce?
Don’t Raid Retirement Savings
It’s often tempting to dip into retirement savings early. After all, it looks like this big chunk of cash is just sitting there, waiting to be spent. This is especially enticing if you rack up significant expenses or lose income during the divorce process.
However, remember that every time you make a withdrawal, you erode your retirement savings. Not to mention, you face taxes, fees, and penalties for early withdrawals. It may be worth it or even necessary in some situations, but make this decision carefully.
Be Aware Of Mutual Debt
Washington is a community property state, which has a substantial impact on divorce settlements. Under these statutes, the court views all assets acquired during a marriage as belonging equally to both spouses and subsequently divides the property accordingly.
So, too, is debt.
This is an issue in marriages of all lengths, but if your spouse has been building debt for years without your knowledge, you could be in for a nasty surprise.
If you’re close to retirement, you don’t want to start a new phase of your life in a deep hole. It’s yet another reminder to keep a close eye on the family finances, all of them.
Like most situations involving money and ending a marriage, things get complicated when it comes to divorce and retirement. There’s a lot to consider and many moving parts, and these are just a few.
Related Reading: How Is Debt Divided During A Divorce?