Divorce While Retired: Three Ways to Avoid More Pain

Kristin Orman By Kristin Orman, Research Analyst, The Oxford Club


After 33 years of marriage, rock and roller Ozzy Osbourne and his “right arm” Sharon may soon be singing a new tune: “gray divorce.” It’s the name coined for the rapidly rising divorce trend among baby boomers.

Couples over the age of 50 are divorcing twice as much today as they were 20 years ago.

Two decades ago, the over-50 crowd accounted for only 10% of divorces. Today, it’s 25%. And for nearly half of these divorcing couples, it’s their first marriage.

Of course, going through a divorce at any age can be a major emotional and financial setback. But divorcing near or during retirement can be especially catastrophic to the lifestyle you planned for your golden years. There are typically many more assets to split than when you’re younger. And don’t forget, there’s less time to make up losses.

Here’s what you need to know about dividing assets during a “gray divorce.”

Splitting Up… and Cashing Out

For many couples, their 401(k)s or pension plans are their largest retirement accounts. Dividing them efficiently takes planning in order to maximize the amount both parties walk away with.

But you have to be careful. Avoid withdrawing a lump sum and dumping it into a new account. Doing so would result in a hefty tax bill and penalty fees.

Consider splitting a 401(k) or pension plan, tax-free, with a court-ordered qualified domestic relations order. It tells the plan administrator how much money each spouse gets. The receiving spouse can then deposit the lump sum into another tax-sheltered account.

Splitting an IRA requires a different process, called “transfer incident to divorce.” The divorce decree generally includes language that allows the IRA owner to transfer some or all of the account balance to the ex’s IRA.

The IRA transfer will be tax-free for both parties until money is withdrawn from the accounts.

If the money is not rolled into another IRA, the recipient will be responsible for paying ordinary income taxes… and possibly a 10% early withdrawal fee as well.

Social Security Surprise

Social Security is a retirement asset many people forget about during divorce. That’s because there is nothing to split up.

But there is something to claim.

If the marriage lasted 10 years or more, the lower-earning spouse may be entitled to collect a “spousal benefit” worth up to 50% of their ex’s benefits. This doesn’t reduce the higher-earning spouse’s benefits, though.

The lower-earning spouse can claim the Social Security payment even if their higher-earning former spouse is eligible, but not yet receiving benefits.

Planning for One

After divorce, your lifestyle will change. Without a prenuptial agreement, you will likely end up with about half of your assets. And even after the attorney fees and legal expenses are paid, living as a single person will cost a lot more.

But your investment strategies shouldn’t look much different than they were before.

With the help of a financial planner, you can navigate the territory in a way that makes sense for your investments and your new lifestyle.

If Sharon and Ozzy decide to split, it probably won’t have a major impact on their financial habits. But for most “gray divorce” couples, that’s not the case.

That’s why it is important to understand the intricacies of a “gray divorce.” Divorce is certainly no fun. But knowing your financial options and the pitfalls to avoid will make it that much less painful.

Good investing,