‘Gray Divorce’ on the Rise
More and more older couples are calling it quits, and the financial ripples extend far beyond property division. “This upward trend in 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.”
The rise of gray divorce, in fact, affects some couples’ retirement and estate planning efforts dramatically, says 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 summit, 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 over-age-50 divorce. Besides 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.
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 in clients’ estate plans. Chief among these changes is the elimination of the “stretch-IRA [individual retirement account]” strategy, but there are others to consider.
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. Last year, the center’s National Retirement Risk Index (NRRI) 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 where one spouse is previously divorced, the risk rises by 9 percentage points.
Other costly effects of a divorce include short-term legal fees. Divorce also commonly results in the sale of a 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 what are now two households. If financial assets can be divided without being sold, divorce may not reduce total wealth. But if assets are sold, again, the timing may be bad and sales can involve transaction costs.
According to the Boston College research, divorce also increases daily living expenses because each ex-spouse now supports a household. They lose the federal income tax break that married couples receive, and, in addition, divorced couples often have children to look after, which can impede each individual’s ability to earn a living.