Divorce is mentally exhausting and is a period when emotions are at an all-time high. While those going through a divorce may want it to be resolved as quickly as possible, it is something that should not be rushed since you will be living with the outcome for many years.
“Once the papers are signed, it becomes much more complicated to negotiate changes to the terms of the divorce,” said Kathleen M. Christensen, CPA/PFS, CDFA®. “While going through a divorce is a challenging time, I always tell my clients not to rush to sign and be done with it. My job as a financial partner is to help people move forward, reset their priorities, and make sure they are still on track to reach their long-term goals.”
The gray divorce rate, or divorce in people ages 50 and older, has doubled since the 1990s. This trend is attributed to longer life expectancies, postponing divorce until the kids are grown up, and lockdowns during the COVID-19 pandemic. Regardless of the reason, divorce is a life event that should be discussed with your financial advisor before it is finalized.
Gray divorces are more complex because there are usually more significant assets on the table versus a shorter marriage. You may be splitting retirement accounts and pension benefits and weighing the division of assets as well as alimony payments. If you or someone you know is going through a gray divorce, there are several key factors to keep in mind.
Revisit Your Financial Goals
After you have given yourself time to process the end of the marriage, reach out to your financial advisor. It is critical to rethink your personal and financial goals moving forward as the divorce may alter them.
Will it impact your retirement timeline? And if you are not working currently, will you need to go back to work? Will you have to sell the family home and downsize or move closer to your kids and grandchildren? Your advisor can help you carefully map out a plan to reach your new goals and ensure your investment strategy aligns with them going forward.
The importance of working with a Certified Divorce Financial Analyst (CDFA®) cannot be understated as these individuals have work experience in this field and have undergone intensive, additional training to better understand the complexities of divorce and how they can impact your overall financial plan.
Build a Trusted Team
In addition to your financial advisor, it is important to reach out to a divorce attorney. Communicate your newly established goals to help them better understand your current wants and needs. Your divorce attorney will help you obtain the divorce itself and will make sure you understand the tax consequences of the divorce negotiations and proposed settlements.
One of the things that makes a gray divorce so complex is the division of assets. In addition to acquiring more sizable assets, like real estate, investment accounts, retirement accounts, jewelry, artwork, and collectibles, a long marriage makes it more difficult to determine any pre-marital assets. Gather several years of tax returns and all investment statements to review with your attorney.
“Ideally, you’d like each person to walk away feeling like they were able to reach a fair and livable settlement,” said Christensen. “Neither party gets everything they want in a divorce, so it is important to be mindful that there needs to be some level of giving and take.”
Retirement Planning & Tax Implications
When going through a gray divorce, the potential impact on your retirement date can be significant, particularly because the timeline to retire is shorter.
Not all assets are created equal, and it is important to consider both tangible and intangible assets as well as tax consequences in these negotiations. The ideal situation in a divorce settlement is to divide assets so that both parties have similar tax implications. Your attorney can help you to negotiate the division of retirement accounts, pensions, and annuities.
If you are planning to divide retirement assets, talk with your tax advisor about the potential tax implications. Typically, retirement transfers are tax-free, but your advisor can guide you through your specific situation. Further, be aware that there were changes made to alimony payments in accordance with the Tax Cuts and Jobs Act (TCJA) of 2017. For divorces finalized after January 1, 2019, alimony payers no longer receive a tax deduction for payments, and alimony recipients are not taxed on the payments.
Create a Financial Checklist
With so much to think about during a divorce, creating a checklist can help you keep track of the bigger and smaller tasks to help get your finances in order. Here are some key items to include on this checklist.
- Close any joint bank accounts and reopen individual ones. Also, be sure to cancel any joint credit cards.
- Review and update the beneficiaries listed on your retirement accounts, life insurance policies, etc.
- Work with your estate attorney to create a new will and estate plan.
- Designate a new health care representative to make healthcare decisions as well as a new financial representative to act on your behalf in the event you become incapacitated.
- Ensure that your spouse is removed from your property and casualty insurance policies.
A Trusted Friend
The guidance provided by a financial advisor during life events like a gray divorce can help you to make sure you understand the long-term consequences of the decisions you are making, reset goals moving forward and ensure that both your financial plan and investment strategy are in alignment. Advisors are also often there for their clients as trusted friends.
To talk with one of our financial advisors about your divorce, please contact us at 860-470-0290 or by filling out the contact form.