Published February 14, 2013
This scenario is very familiar to boomers: a couple, married 30-plus years, with three great kids, maybe some grandkids, living in a beautiful home and nearing retirement call it quits and head to divorce court.
Baby boomers turned empty-nesters are increasingly filing for divorce as they find themselves no longer happy with the partner they have spent so many years with.
New research by sociologists Susan Brown and I-Fen Lin of Bowling Green State University find the divorce rate among people 50 and over continues to increase. For new baby-boomer empty nesters, the divorce rate has doubled over the past two decades with 1 in 4 now getting divorced.
Getting divorced later in life can impact boomers’ financial situations in a very complex manner especially when it comes to dividing retirement accounts.
According to Howard Hook, a certified financial planner with EKS Associates in Princeton, N.J., when it comes to aging and finances, the cards are often stacked against singles—especially newly-solitaire boomers.
Hook offered the following advice to suddenly-single boomers on how they can best protect their assets and navigate their finances when in or approaching retirement:
Boomer: What disadvantages would suddenly-single baby boomers encounter in terms of taxes and deductions?
Hook: Suddenly-single baby boomer will be paying a higher percentage of tax on their income compared to married boomers.
Here’s an example:
Two households both earning $150,000. Household A consists of a single baby boomer and Household B consists of married baby boomers. Household A will pay 19% more federal income tax than Household B.
The tax code is written such that more of the taxable income for a household consisting of married taxpayer’s is taxed at lower rates than the taxable income in a single household’s taxable income.
Another disadvantage for singles is the potential loss of certain tax deductions that may have been taken while married. For example, someone who received the primary residence as part of a divorce settlement would continue to take a deduction for property taxes while the person not receiving the home as part of the settlement would not be able to take the deduction unless they bought another home.
Boomer: What retirement strategies do newly-divorced boomers not have that are available to married people?
Hook: The ability to stretch pension benefits over more than one life span.
Companies that offer a pension plan for their employees many times do not allow an un-married person the option of paying the pension over “joint lives”, an option available to a married employee with their spouse. This can be harmful for a recently-divorced person who may be financially supporting a sibling or an older parent who wants reassurance the relative will be taken care of if they pass away.
Singles also lose the ability to maximize the amount of money saved in a qualified retirement account such as a 401(k) or 403(b).The maximum contribution for someone over age 50 to a 401(k) plan is $23,000 (in 2013). A married couple where both spouses are eligible for a 401(k)plan can contribute twice the amount or $46,000 in total.
Boomer: Why do you find that newly single boomers are largely ignored by financial professionals and how can they get the financial assistance they need?
Hook: There is a misconception that certain planning strategies do not apply to single people.
For example, one of the reasons for someone to buy life insurance is to provide for a surviving spouse’s needs. There may be an assumption that without a spouse, the single boomer may not need life insurance. This may have been true many years ago, but today, many people find themselves caring for older family members or domestic partners that would need the life insurance.
One of the most common estate planning strategies to reduce estate taxes is for spouses to create trusts for each other’s benefits in order to maximize the amount of assets that can pass to their beneficiaries free of Federal and / or state estate tax. For a boomer with no spouse, there may be a presumption that there is no need for this trust. However, there are other, non-tax reasons to create trusts (creditor protection, control of timing of distribution of assets after death are two), that make the inclusion of a trust for a single person as important as for a married person.
Boomer: What happens with joint credit cards and installment loans, how can single boomers best deal with these financial burdens?
Hook: Much depends on the divorce agreement as to who is responsible to pay these debts. Proper planning before the divorce is finalized is crucial to dealing effectively with these issues.
If the single boomer is saddled with paying debt, care should be taken as to how to pay off the debt. If current income is not sufficient to do so, then the assets received in the divorce become important. Non-liquid assets (such as a home) or retirement assets are not particularly good assets to use to pay off debt. Paying off debt by refinancing a home may make sense, but may not be possible depending upon the ability to qualify for a mortgage. Taking distributions from retirement assets is tax inefficient as taxes need to be paid on those distributions, causing more money to come out of the account to pay the tax than needs to be taken to pay down the debt.
If assuming debt is part of the agreement, then a portion of the assets received in the divorce should be liquid assets not located in retirement accounts.
Boomer: What should suddenly-single boomers take into financial consideration before selling the home they have jointly owned for 20-plus years?
Hook: When selling a home, boomers need to take into consideration the costs of a new home and the taxes that will be incurred upon selling the existing home.
Someone who has not purchased (or rented) a home for more than 20 years may not realize the increased costs associated with the initial purchase of a new home (closing costs, repairs and maintenance) as well as the ongoing costs of a new home (property taxes, utilities, etc.)
Income taxes on the sale of the home are also important and tricky. The tax code allows the first $500,000 of gain on the sale of a home considered to have been the primary residence of a married couple in two of the previous five years. This exclusion is only $250,000 for a single taxpayer. Therefore, if the boomer who is about to become single intends to sell the home, it may make sense to do so in a tax year that they can still file as married with their spouse. If this is the case, the single boomer receives the proceeds from the sale. The amount of the exclusion is dependent upon the marital status of the single boomer at the end of the tax year in which the home is sold and not the marital status at the date of sale. Therefore, it may be necessary to delay the final divorce agreement until after Dec. 31 of the year of sale to take advantage of the $500,000 exclusion.