Gray Divorce: Financial Considerations When Divorcing Later in Life

Divorce later in life can present financial challenges that are different from those facing younger couples. Often referred to as "gray divorce," divorce among older adults may occur when couples have accumulated significant assets, are approaching retirement or have already stopped working.

At this stage of life, there may also be less time to recover financially from decisions made during a divorce. Understanding how income, housing, health care, Social Security and other considerations fit together can be an important part of planning for what comes next.

Dividing Retirement Income Between Two Households

For couples who are already retired, income can be one of the biggest considerations.

Rather than relying on employment income, retirees may be living on a combination of pensions, Social Security and distributions from retirement accounts. Those income sources may be relatively fixed, with limited opportunity to substantially increase them later.

After divorce, the same financial resources may need to support two separate households. Understanding how those income streams may be divided and what each person's expenses could look like afterward is an important part of evaluating a potential settlement.

Deciding What to Do With the Home

A longtime family home may be one of a couple's largest assets, but determining what to do with
it can become more complicated later in life.

Selling a home that has appreciated significantly could have tax implications. Keeping the home may create its own challenges, particularly if refinancing is necessary and the spouse who wants to remain there is living on a fixed retirement income.

Housing alternatives, including more affordable 55-and-older communities, may also become part of the conversation. In some circumstances, a reverse mortgage may be another option to evaluate.

The decision involves more than determining who receives the house. It's important to consider whether the long-term costs and financing fit within each person's post-divorce financial plan.

Plan for Health Insurance Costs

Health insurance can become a significant consideration when divorcing before Medicare eligibility. 

If one spouse receives health insurance through the other's employer, divorce could mean finding and paying for individual coverage. Depending on the circumstances, those costs can have a meaningful impact on a post-divorce budget.

Health insurance and the timing of Medicare eligibility should therefore be considered when evaluating the financial implications of divorce later in life.

Review Social Security Benefits

Social Security can also play an important role in retirement income planning following divorce.

Depending on the circumstances, a divorced spouse may be eligible for benefits based on a former spouse's earnings record. Understanding the applicable rules and how different claiming strategies could affect retirement income can help inform a broader financial plan.

Social Security decisions should be considered alongside pensions, retirement accounts and other available sources of income rather than in isolation.

Consider Required Minimum Distributions and Taxes

Required minimum distributions from retirement accounts can create another layer of planning. 

As distributions begin, they can affect taxable income, cash flow and potentially Medicare costs. For someone approaching the age when required distributions begin, understanding how the retirement assets received in a divorce could affect future income and taxes may be particularly important.

Looking several years ahead can help identify consequences that may not be obvious when simply comparing the current values of different assets.

Don't Overlook Insurance

Existing insurance coverage can become particularly valuable later in life.

Replacing a life insurance policy may become more difficult or expensive with age, particularly if health circumstances have changed. Before allowing an existing policy to lapse, consider how it fits into the financial needs of both parties after the divorce.

Long-term care is another consideration. If each spouse will be living independently after divorce, planning for potential future care needs can become even more important.

Plan Beyond the Divorce

Divorcing later in life isn't simply about dividing accumulated assets. It can require rethinking how each person will fund retirement, where they will live, how they will pay for health care and how their financial resources will support them for the rest of their lives.

There are personal considerations as well. Older couples may share adult children, grandchildren and family milestones for years after their marriage ends. Navigating the process in a way that limits unnecessary conflict may make it easier to preserve those important family relationships.

A thoughtful financial plan can help bring these pieces together and provide a clearer picture of life after a gray divorce.

This article is based on the Paths Through Divorce podcast episode “Gray Divorce: Financial Aftermath and Planning,” from EP Wealth Advisors.

EP Wealth Insights Podcast Disclosure

The speakers featured in this podcast are employees and/or Investment Adviser Representatives of EP Wealth Advisors. The information discussed is provided for educational and informational purposes only and should not be considered personalized investment, financial, tax, or legal advice.

The views expressed are those of the speakers as of the recording date and are subject to change. Investing involves risk, including the possible loss of principal, and past performance does not guarantee future results.

Before making financial decisions, consult your financial, tax, or legal professional. EP Wealth Advisors is a registered investment adviser. For additional information, including our Form ADV, please visit www.epwealth.com.