People are consistently living longer, healthier lives. As couples age, as their children become adults, and as they retire, there’s often a great deal of life yet to live. Years and years in many cases. Increasingly, people are opting for gray divorce.
The term gray divorce has been all over in the last few years. It refers to couples who divorce later in life. It’s one of the fastest growing divorce demographics. Since the 1990s, the numbers for divorce after 50 have nearly doubled.
There are many reasons for this. Living longer means more opportunities to do things you’ve always wanted. Changing gender dynamics and societal expectations mean people are often less likely to stay in an unhappy marriage into their twilight years. Like with divorce at any other time, the reasons are nearly endless and unique to the people involved.
But gray divorce comes with its own set of complications and concerns. Especially if you’re nearing retirement or already retired. Mistakes in gray divorce can decimate retirement savings and have a huge impact on your financial future. Here are a few common missteps to avoid.
1) Not Knowing What You’re Entitled To
Two people weave their lives together in a marriage. Over time, every thread becomes intertwined. At a certain point, you’re eligible for certain benefits based on your spouse, like Social Security.
When you’re married more than ten years, you may qualify to receive Social Security benefits based on your ex’s work history.
This often applies to other things as well, like pensions. You may be leaving money on the table you didn’t even know existed. It’s vital to educate yourself and learn what assets you’re entitled to.
2) Raiding Retirement
Retirement savings often look like a big wad of money just sitting there not doing anything. It’s practically begging to be spent, and it’s tempting to dip your hand in that cookie jar a bit early.
Divorces tend to cost a lot, so this desire may grow even stronger when strapped for cash. But that comes with downsides.
Every time you withdraw funds, you eat away at your retirement savings. You need this money to live when you actually retire. Hopefully, you have many years ahead of you, but the more you spend now, the less you have then.
You also have to deal with fees, taxes, and penalties for early withdrawals. The pull is real, but people too often fall into this hole after a gray divorce.
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3) Ignoring Shared Debt
California is a community property state. This means the court views all assets acquired during a marriage as belonging equally to both spouses. As you might imagine, this has an impact on divorce settlements and the division of property.
The thing is, the law looks at debt the same way. If your spouse spent years building up debt in secret, you may be in for a rude awakening. Whether you were aware of it or not, you may wind up saddled with an unexpected burden.
4) Gray Divorce And Taxes
Taxes are complicated in the best of times. After a gray divorce, ignoring the tax implications of divided retirement benefits adds a whole new layer. Though you think you’re getting one thing, you may wind up with something else entirely.
For example, do you know the differences between a traditional 401(k) or IRA versus a Roth 401(k) or Roth IRA? One’s taxable, one isn’t.
Say you have a $100,000 401(k). The IRS taxes that amount when you remove money, so you wind up with significantly less.
With a Roth IRA, by comparison, you pay the taxes when the money is deposited, not withdrawn.
On paper, a $200,000 IRA and $200,000 Roth IRA may look the same.
In reality, they may provide very different results. Knowing details like this can help you negotiate the best settlement.
Related Reading: How the New Tax Plan Changes Spousal Support Payments
5) Home Sweet Home
For most people, a house is the biggest purchase you ever make. But it’s so much more than a simple possession. It’s where you live, raise kids, and build a life. During a gray divorce, it’s also often the biggest asset to divide.
Because of this and the emotional connection, many people fight to keep the house. That’s not always in your best financial interest. Houses cost money to maintain. You also have mortgages and taxes.
This can be tricky, especially if you’re doing so with retirement savings or on your own for the first time. Depending on your circumstances, you may be better off taking other assets. Another option is to sell the home and split the proceeds. It may be difficult, but it may also be for the best.
In most situations in gray divorce, it’s important to examine all of the options. The financial decisions you make now impact your future economic status. Ending a marriage is complicated enough, but when retirement looms, these consequences become uncomfortably immediate.
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