Surviving a Gray Divorce - Part 1
While divorce at any age is difficult, divorcing later in life is qualitatively different than divorcing earlier in life. The reason is simple: finite resources.
When you are older you have a limited amount of time, money, and energy to recoup whatever you lose in your divorce.
When you get divorced in your 50’s, 60's, and beyond, you no longer have decades to rebuild your finances or your life. You may already be retired and your income may be fixed. Or you may have been hoping to retire soon. Either way, your career has likely peaked and your income is probably not going to go up in any serious way.
Here are 4 critical areas you must understand when you divorce later in life. We'll examine 4 more next week.
1. Cash Flow. Surviving a divorce after 50 requires more than just getting a good divorce settlement. You also need to make sure that you bring in enough money every month to pay your bills. In other words, you need positive cash flow.
How do you figure out if you're going to have positive post-divorce cash flow? It starts by making a detailed monthly post-divorce budget BEFORE your divorce is final!
If you can see from your budget that you are not going to have enough money after your divorce to pay your bills you have three choices: make more, spend less, or live off your assets.
Making more may mean that you need to get a job. (Yes. That’s frightening!) Spending less may mean seriously downsizing your lifestyle. And living off your assets only lasts for so long.
Once you spend down your assets, they’re gone. So, unless you can afford to live off your assets without risking that you will run out of money before you die, burning through your assets at warp speed after your divorce is a really bad idea.
2. Kids. While everyone understands that divorce affects minor children, many people assume that getting a divorce later in life won’t affect their adult children.
It doesn’t matter how old your kids are. Your divorce will change their family forever. It will affect their relationships with you and your spouse. It may also affect their finances moving forward.
If your divorce leaves you (or your spouse) penniless who do you think will keep you from living on the streets? Your kids!
If your kids have to support you, your divorce will affect their finances. (Think about that when you’re negotiating your divorce settlement!)
Your divorce will also affect your kids emotionally. Adult children of divorce often have problems dealing with the demise of their parents’ marriage. It rocks their sense of security. It undermines their faith in marriage as an institution. It also shakes their own relationships to the core.
The bottom line is that you probably can’t shield your kids from all of the effects of your divorce. But if you pay attention, you may be able to at least soften the blow in significant ways.
3. Taxes. The amount of taxes you have to pay on the assets you get in a divorce can dramatically affect your bottom line. If you don’t understand that, then you may be surprised at what’s left after you pay Uncle Sam.
What’s more, if you were expecting to live off of your assets after you divorced, then the amount of money you actually get after taxes matters a lot!
While explaining all of the tax ramifications of divorce in one relative short blog post is impossible, there are a few basics you absolutely need to know. For example, you need to know the difference between pre-tax assets and post-tax assets.
Pre-tax assets are those assets that you HAVE NOT paid taxes on. Post tax assets are those assets that you HAVE paid taxes on. A Roth IRA is a post-tax asset. A regular IRA is a pre-tax asset.
Getting $100,000 from a regular IRA will not put $100,000 in your pocket. It will put $100,000 minus income taxes in your pocket. Getting $100,000 from a Roth IRA, on the other hand, will give you $100,000.
If you don’t pay attention to how taxes will affect your divorce settlement, you may find yourself dealing with a much different financial picture after your divorce than you had planned.
4. Spousal Support (a/k/a Alimony or Maintenance) Spousal support can play a huge role in many later-in-life divorces.
Paying long term maintenance can be a sizeable obstacle in divorce negotiations. So can securing those payments.
When someone is going to have to pay spousal support after divorce s/he also has to make sure that there is enough money to keep making those payments even after s/he dies. Most people do that by buying a life insurance policy on the paying spouse’s life.
But getting a life insurance policy after 50 (or 60!) can be expensive or impossible.
If the spouse paying support has a serious health condition, s/he may not be able to buy life insurance at all. Or, s/he may find that the cost of buying the insurance is totally off the charts! Because of that, securing maintenance is often a much bigger challenge for older couples than it is for younger ones.