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By Martha C. White
January 29, 2020
Kiersten Essenpreis for Money

More and more couples are calling it quits on their long-term marriages, and this so-called “gray divorce” can throw retirement plans into disarray. But careful planning can mitigate the financial fallout, advisors say.

According to data from the Pew Research Center, divorce rates among people over 50 have doubled since the 1990s. Those at particular financial risk are spouses who might have stayed at home to raise a family — who are not always, but most typically, women. Divorce can be particularly disorienting for spouses who sidelined a career to raise a family and have little or no retirement savings in their own name. Some might also have ceded control of the family finances to their breadwinning partner, so they don’t have a strong foundation on which to build a new financial plan.

“Most people need a whole new plan, because the landscape has changed,” says Joseph Heider, president of Cirrus Wealth Management.

It may seem daunting, but it’s important to get a grasp on your finances, especially if you never handled the family budget, says Meredith Stoddard, experience lead for life events at Fidelity Investments. “That gives you some sense of control and empowerment,” she says. (She recommends Fidelity’s divorce document checklist as a good starting place if you’re feeling overwhelmed.)

While most of the advice below pertains to anyone facing a divorce after decades of marriage, financial planners say it’s especially relevant for those confronting the prospect of being financially independent after a long hiatus or for the first time ever. Here are a few steps to take before your divorce is finalized:

Recalculate your budget

A 2018 paper from the Center for Retirement Research at Boston College found that divorce is correlated with “substantially” increasing the likelihood of financial risk in retirement. The paper notes that divorce can erode household wealth in several ways: The cost of legal representation and fees can have a short-term financial impact, while the establishment of two separate households — and the doubling of all the attendant costs — can have a more lasting impact on your standard of living and ability to save money.

According to a new survey from Fidelity Investments, more than one in three respondents who went through a divorce say they were still financially struggling five years later. Fidelity found that even among people who were actively involved in managing household finances, more than one in four were surprised by how much it cost to live alone.

Creating a realistic budget will help you avoid pricey miscalculations. Make sure to include some savings in your plan. “Start small,” Stoddard says. “Build an emergency fund over time, even if you start at $50 a month.

One thing you shouldn’t do, according to experts, is to start investing in much riskier assets classes or funds in an attempt to play catch-up. With a shortened time horizon before retirement, you don’t have wiggle room to weather an outsized downturn and wait for a subsequent recovery. Steer clear of flashy investments guaranteeing high returns or fat yields and stick to basic index funds that track the broad stock and bond markets.

More than one expert brought up the emotional toll of divorce in the context of your budgeting: If you can afford it, consider setting some money aside for therapy.

Get — or remain — in the workforce

Stoddard says a common worry among stay-at-home spouses is that divorce equals financial ruin, since they weren’t earning a paycheck in their own name. But this is a misconception. “Women often devalue work around the house and caregiving. Don’t forget that is a contribution to the marriage. When it comes to dividing assets, there is a value there,” she says. Divorce courts will take that time and labor into account when determining how much of a couple’s collective assets each party gets.

Even so, Stoddard (and others) recommend joining the workforce. “If you haven’t worked outside the home for a while, just taking any job and getting into a routine can build your confidence,” Stoddard says.

Heider adds, though, that you might need to adjust your expectations if you’re returning to the workforce after a long absence. “They need to take a realistic assessment of what their job skills are. They need to be realistic about what kind of pay they’re going to be starting at,” he says.

Keep in mind that a paycheck isn’t the only reason to work. Until you reach the Medicare eligibility age of 65, the need for health insurance is also a big motivator to enter or re-enter the workforce. Depending on your spouse’s health coverage and the state where you live, you may be able to continue paying for COBRA coverage for a period of time, but this can be prohibitively expensive for people already stretched thin by the expense of the divorce itself and the cost of establishing a separate household. Coverage through an employer can be cheaper than both COBRA and the coverage that you can buy on the individual market through the Affordable Care Act.

Maximize your Social Security benefits

Delay drawing Social Security as long as possible to maximize any spousal benefits you can claim. If you were married for at least 10 years, you’re eligible for Social Security benefits based on your ex-spouse’s work history.

This is even true for the many spouses — generally women — who don’t have a work history of their own. “For those women, it’s very important to delay Social Security as long as they can to ensure they get a slightly bigger benefit,” says Geoff Sanzenbacher, associate professor of economics and a research fellow at the Center for Retirement Research at Boston College. “The biggest thing they can do is to try and maximize that benefit.”

If you claim at age 62, you’ll get roughly 75% of what you would have received had you waited several years for what the government calls your full retirement age, when you get 100% of what you’re eligible for. You can receive even more than that — what the government calls “delayed retirement credits” — if you can postpone beyond full retirement age, up to age 70. The difference can add up to tens if not hundreds of thousands of dollars over the course of a long lifetime.

Establish a retirement account in your own name

If you don’t have your own IRA, establish one before the divorce is finalized. You’ll need one of these tax-deferred retirement vehicles to deposit the retirement assets you get from your spouse without incurring a penalty. That claim takes place through a process called a QDRO, or qualified domestic relations order, which is generally undertaken in conjunction with, but is legally separate from, a divorce order.

“The nonworking spouse needs to set up an IRA and have that money transferred directly so there’s no tax paid on it and it continues to build,” Heider says. The IRA should be set up by the time the legal paperwork is done, so the money can be transferred directly into the new retirement account. If you cash out and get a check, the government withholds 20% as an estimate of what you would owe in income taxes on those funds (although you won’t be hit with the additional 10% penalty for withdrawing funds before the age of 59.5).

While cashing out might give you funds in the short term, keeping that money invested in a tax-deferred retirement account will contribute much more to your long-term financial security, financial advisors say. And don’t be afraid to seek help from a professional, Heider adds, because the stakes are high for making the right financial choices.

“It’s particularly critical if the spouse hasn’t worked outside the home, and what’s even more perilous is if that person has not been dealing with the finances. That spouse is going to get half a retirement plan and have no idea what to do with it,” Heider says.

If your spouse has a pension, you may have a claim to part of it in the case of a divorce. According to the Pension Rights Center, pensions earned during a marriage are typically viewed as joint assets, although how they are divided and whether or not an ex-spouse is eligible for survivor’s benefits are decided at the state-court level.

Use real estate assets strategically

If you own a home, selling might be your best move, experts say. Painful as it might be to leave a place where you might have lived for decades, emotions should not dictate real estate decisions.

“The house is only a useful resource for retirement if it’s sold and that money isn’t used immediately,” Sanzenbacher says. “What people typically do with their house is nothing. People typically enter retirement in the house they’ve always been in and they tend not to use that asset for retirement at all.”

“The thing is, a lot of times people can’t afford the house at a certain point,” says Cindy Hounsell, president of the Women’s Institute for a Secure Retirement. “I think they don’t pay attention to what needs to be done in the house,” she says, pointing out that big expenses like a new roof or heating system can be a huge financial burden in the years immediately following a divorce. What’s more, you want to be able to time the sale of your home, instead of having your hand forced by mounting expenses or a health emergency.

“I think more important, strategically, is going to someplace where you can age successfully where there are services, where there are doctors offices nearby,” Sanzenbacher says. “Downsize wisely to a place you think you can grow old in.”

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