Creating an After-Divorce Action Plan

The number of individuals getting late in life divorces has quietly increased over the last several years. The U.S. now has the highest marriage rate and the highest divorce rate in the world. In 2009 the population of the U. S. was more than 303 million, with 4.95 of every 1,000 people being divorced¹.

The table below indicates that as of 2004, according to the Survey of Income and Program Participation (SIPP), 11,219,365 individuals in the United States 50 years old and older were divorced. This is an increase of two million 50 year old and older Americans from the 2001 SIPP Survey^{2 3}.

The table also indicates that 39.5 percent of women age 50 years and older, a total of nearly five million, are divorced (vs. 36.8 percent of women in 2001). The divorce statistics for men are more disquieting. In 2004, the SIPP survey showed that 46.0 percent of men, nearly 6.4 million in total, age 50 years and older are divorced (vs. 43.5 percent of men in 2001). To sum it up, the SIPP Survey indicates that more people are getting divorced later in life.

The Financial Impact of Divorce on Women

Several studies indicate that divorce is financially more difficult for women than men. The Social Security Administration’s (SSA’s) Project on Modeling Income in the Near Term (MINT)⁴ projections show that an increasing percentage of older women will be divorced in retirement. According to MINT data, of the women in the 1931-1935 birth cohort about 12 percent will be divorced when they reach age 67. In contrast, of women in the 1956-1960 birth cohorts around 20 percent will be divorced when they reach age 67. Therefore, MINT projects that the proportion of older women who are divorced will increase.

Additionally, MINT forecasts that the number of women eligible to receive retired-worker benefits based on the earnings of their ex-spouses will decrease. The MINT study indicates that divorced women are married for shorter periods of time. Therefore, an increased number of divorced women will not meet the 10-year marriage requirement to receive their ex-spouses Social Security retirement benefits. For many older divorced women, this may mean the difference of living near the poverty level or living in comfort.

In many families, the wife has counted on her husband’s retirement benefits. This is often due to the time the wife has spent away from her career to raise the children, or due to taking low-paying jobs with few responsibilities so that she is available for her husband and children. This results in lower Social Security retirement benefits. According to the MINT study, divorced women are projected to rely increasingly on their own retired-worker benefits. Therefore retired women will frequently not be as economically well-off as men.

While many women are aware that they will not receive the amount of Social Security retirement benefits they expected when they were married, they often do not take other retirement precautions. For example, according to a Scudder-Kemper survey of working women, women usually have a lower employer retirement plan participation rate and save less than their male counterparts. The Scudder-Kemper Survey goes on to indicate that 43 percent of men have accumulated over $100,000 in 401(k) plans compared to 27 percent of women⁵. Additionally, other study results published in the Journal of Pension Benefits (Winter 2004)⁶ show that 93 percent of “Boomer” women say they are saving for retirement, but more than 47 percent are not contributing to a retirement plan.

Creating an After-Divorce Action Plan to Gain Financial Control

According to the Wall Street Journal (February 20, 2010)⁷, for many couples retirement funds are the family’s largest financial asset. Dividing retirement resources can be challenging. A soon-to-be ex- spouse may claim part or all of the family’s retirement assets. When the divorce court determines that a large amount of retirement savings will be transferred to an ex-spouse, it is not impossible to ascertain what changes need to be made to re-establish financial security. The information needed includes:

• Determining how much capital is needed for retirement 
• Tallying-up all remaining assets 
• Discovering the performance of current savings and investments 
• Determining the projected growth rate of current assets over the next 25 years 
• Understanding the steps necessary to receive company, government or other retirement benefits 
• Identifying how interest rates and inflation can affect current savings and investments after retirement 
• Developing several investment strategies that will improve financial security 
• Identifying the tax treatment applied to various accounts, and how much after tax income each may provide

Once the capital needs assessment is complete the newly divorced individual will know how much he (or she) needs to save for retirement. At this point, an After-Divorce Action Plan can be developed to help regain financial control.

More Gold for the Golden Years

There are many areas that can generate income for financial recovery. The following are three topic areas that can provide a basis for the After-Divorce Action Plan. The topic areas include the late-in-life divorced work life, household finances and home. 

Work life: Over the last several years a pre-determined retirement date has been replaced with a range of 20 to 30 retirement years that could begin sooner or later than expected. For those that have a retirement plan shortfall the following actions can generate needed income:

• Start a new career: Can the individual’s skill-set be transferred to a new full-time or part-time job?
• Working longer (more hours per week): Longer hours can accrue more income and benefits to reach the pre-determined retirement goal. 
• Using a “Phased-Out” Retirement: Some employers are offering older workers the option of continuing to contribute their talents and experience on a scaled back basis. 
• Retiring later: Postpone retirement for one- , two- or more years.

The number of individuals getting late in life divorces has quietly increased over the last several years. The U.S. now has the highest marriage rate and the highest divorce rate in the world. In 2009 the population of the U. S. was more than 303 million, with 4.95 of every 1,000 people being divorced¹.

The table below indicates that as of 2004, according to the Survey of Income and Program Participation (SIPP), 11,219,365 individuals in the United States 50 years old and older were divorced. This is an increase of two million 50 year old and older Americans from the 2001 SIPP Survey^{2 3}.

The table also indicates that 39.5 percent of women age 50 years and older, a total of nearly five million, are divorced (vs. 36.8 percent of women in 2001). The divorce statistics for men are more disquieting. In 2004, the SIPP survey showed that 46.0 percent of men, nearly 6.4 million in total, age 50 years and older are divorced (vs. 43.5 percent of men in 2001). To sum it up, the SIPP Survey indicates that more people are getting divorced later in life.

The Financial Impact of Divorce on Women

Several studies indicate that divorce is financially more difficult for women than men. The Social Security Administration’s (SSA’s) Project on Modeling Income in the Near Term (MINT)⁴ projections show that an increasing percentage of older women will be divorced in retirement. According to MINT data, of the women in the 1931-1935 birth cohort about 12 percent will be divorced when they reach age 67. In contrast, of women in the 1956-1960 birth cohorts around 20 percent will be divorced when they reach age 67. Therefore, MINT projects that the proportion of older women who are divorced will increase.

Additionally, MINT forecasts that the number of women eligible to receive retired-worker benefits based on the earnings of their ex-spouses will decrease. The MINT study indicates that divorced women are married for shorter periods of time. Therefore, an increased number of divorced women will not meet the 10-year marriage requirement to receive their ex-spouses Social Security retirement benefits. For many older divorced women, this may mean the difference of living near the poverty level or living in comfort.

In many families, the wife has counted on her husband’s retirement benefits. This is often due to the time the wife has spent away from her career to raise the children, or due to taking low-paying jobs with few responsibilities so that she is available for her husband and children. This results in lower Social Security retirement benefits. According to the MINT study, divorced women are projected to rely increasingly on their own retired-worker benefits. Therefore retired women will frequently not be as economically well-off as men.

While many women are aware that they will not receive the amount of Social Security retirement benefits they expected when they were married, they often do not take other retirement precautions. For example, according to a Scudder-Kemper survey of working women, women usually have a lower employer retirement plan participation rate and save less than their male counterparts. The Scudder-Kemper Survey goes on to indicate that 43 percent of men have accumulated over $100,000 in 401(k) plans compared to 27 percent of women⁵. Additionally, other study results published in the Journal of Pension Benefits (Winter 2004)⁶ show that 93 percent of “Boomer” women say they are saving for retirement, but more than 47 percent are not contributing to a retirement plan.

Creating an After-Divorce Action Plan to Gain Financial Control

According to the Wall Street Journal (February 20, 2010)⁷, for many couples retirement funds are the family’s largest financial asset. Dividing retirement resources can be challenging. A soon-to-be ex- spouse may claim part or all of the family’s retirement assets. When the divorce court determines that a large amount of retirement savings will be transferred to an ex-spouse, it is not impossible to ascertain what changes need to be made to re-establish financial security. The information needed includes:

• Determining how much capital is needed for retirement 
• Tallying-up all remaining assets 
• Discovering the performance of current savings and investments 
• Determining the projected growth rate of current assets over the next 25 years 
• Understanding the steps necessary to receive company, government or other retirement benefits 
• Identifying how interest rates and inflation can affect current savings and investments after retirement 
• Developing several investment strategies that will improve financial security 
• Identifying the tax treatment applied to various accounts, and how much after tax income each may provide

Once the capital needs assessment is complete the newly divorced individual will know how much he (or she) needs to save for retirement. At this point, an After-Divorce Action Plan can be developed to help regain financial control.

More Gold for the Golden Years

There are many areas that can generate income for financial recovery. The following are three topic areas that can provide a basis for the After-Divorce Action Plan. The topic areas include the late-in-life divorced work life, household finances and home. 

Work life: Over the last several years a pre-determined retirement date has been replaced with a range of 20 to 30 retirement years that could begin sooner or later than expected. For those that have a retirement plan shortfall the following actions can generate needed income:

• Start a new career: Can the individual’s skill-set be transferred to a new full-time or part-time job?
• Working longer (more hours per week): Longer hours can accrue more income and benefits to reach the pre-determined retirement goal. 
• Using a “Phased-Out” Retirement: Some employers are offering older workers the option of continuing to contribute their talents and experience on a scaled back basis. 
• Retiring later: Postpone retirement for one- , two- or more years.

Note: According to a 2009 Survey by the Society for Human Resource Management in Alexandria VA, in 2009 only six percent of the employers surveyed had a formal phased-retirement policy. Therefore, if someone is interested in a “phased retirement” the first step is to ask the employer if it is possible to work something out.

Make hard decisions: With guidance from financial professionals, divorced individuals who are 50 years old and older can make the appropriate adjustments, take the right steps and deal with their new and unexpected circumstances in a way that achieves the retirement results the individual anticipated before the late-in-life divorce. Keep in mind that there may be new rules. One example is paying into the retirement fund before paying into a child’s education fund. Other ways to get through unanticipated financial setbacks in retirement planning include:

• Creating a budget: Use a formal or informal budget to locate “money leaks.” Many people are surprised at how much they spend eating out, on different kinds of memberships and entertainment.  
• Increasing savings: Now is the time to start saving. In a recent survey by McKinsey & Company⁸, 32 percent of pre-retirees said they plan to reduce spending in retirement. However, only 10 percent of retired respondents said they had succeeded in significantly reducing their spending.
• Paying off debt: Often individuals can’t retire due to consumer debt. In April 2010, the Federal Reserve indicated that consumer debt is $2.46 trillion dollars (this includes auto loans, personal loans and credit cards)⁹. During this time period, Creditcards.com stated that average credit card debt per household was more than $16,000.

Look to your home for income: Many years of double digit appreciation have made those 50 and older feel like they had a second bank account. The Census Bureau’s American Housing Survey in 2007¹⁰, the most recent data available, indicates that more than seven million people over the age of 65 with annual incomes below $30,000 own their own homes. The following is a sampling of ways a home can generate proceeds for retirement income:

• Paying off the mortgage as soon as possible: A large portion of the mortgage payment is interest that is owed to the lender. Paying off the mortgage as soon as possible will save tens of thousands of dollars. It is important to remember, that the lender disclosed that the borrower will pay more than twice the purchase price of the home before actually owning it. However, it is important to keep in mind that the selection of this option may impact other income producing assets.
• Selling the home and moving to a smaller house: Homeowners with substantial home equity can sell their homes and pay for less expensive houses. The excess can be invested in an immediate annuity or a more flexible non-qualified account that can boost retirement income.

• With the assistance of a financial professional, consider a reverse mortgage: The Wall Street Journal (June 27, 2010)11 reported that in recent months upfront fees on reverse mortgages have fallen substantially. Reverse mortgages are available to homeowners who are 62 years old and older. For many people who can’t sell their homes, this is one way to defer mortgage payments or make ends meet. 

Conclusion 

Divorce at any age is difficult. Late-in-life divorce presents a unique range of financial challenges. Older divorced individuals have a shorter time-period for financial recovery. Retiring without the capital needed to make ends meet, makes matters worse. For those 50 years old and older, it is critical to get on a personal retirement planning track. The development of an After-Divorce Action Plan provides a blueprint for regaining financial control. With life expectancies increasing there is still plenty of time to implement the things needed for a comfortable retirement.

FPA member Kathleen Sindell, Ph.D., is a financial consultant trained to assist people and organizations in accomplishing their financial objectives. For more than fourteen years, Dr. Sindell has been a member of the Johns Hopkins Carey School of Business practitioner faculty where she teaches graduate level corporate finance, personal investing and personal wealth management. Sindell is the author of numerous academic, popular, and professional finance articles, websites and books. Sindell is regularly tapped as a financial expert on ABC World News, CNNfn, The Nightly Business Report, and at popular online and print outlets.

¹ Anonymous, “People Statistics: Divorce Rate (Most Recent) by Country”, NationMaster.com [http://www.nationmaster.com/graph/peo_div_rat-people-divorce-rate, as of September 15, 2010.]
² Anonymous, “2001 SIPP: Marital History for People 15 Years Old and Over by Age, Sex, Race and Ethnicity: 2001” Number, Timing and Duration of Marriages and Divorces” [http://www.census.gov/population/www/socdemo/marr-div.html, as of September 15, 2010.]
³ Anonymous, “2004 SIPP: “Marital History for People 15 Years Old and Over by Age, Sex, Race and Ethnicity: 2001” Number, Timing and Duration of Marriages and Divorce” [http://www.census.gov/population/www/socdemo/marr-div.html, as of September 15, 2010.]
⁴ Lams, Howard M., Reznik, Gayle L., Tamborini, Christopher R. “, Earnings Sharing in Social Security: Projected Impacts of Alternative Proposals Using the MINT Model”, Social Security Bulletin, Washington: 2009. Vol. 69, Issue 1; pg. 1, 17 pgs.
⁵ Anonymous, “The 1999 Women’s Confidence Retirement Survey”, (1999), sponsored by Mathew Greenwald & Associates, Inc., the Employee Benefit Research Institute (EBRI), and American Savings Education Council (ASEC). [http://www.ebri.org/pdf/surveys/rcs/1999/wrcs_report.pdf as of September 15, 2010]
⁶ Erickson, Susan J., “401(k) Plans: The 401(k) Woman: Sitting on a Wobbly, Three-Legged Stool”, Journal of Pension Benefits, New York: Winter 2004. Vol. 11, Issue 2; pg. 79, 3 pgs.
⁷ Ruffenach, Glen, “Encore (A Special Report) -- Money Matters --- Splitting Up Nest Eggs: Battles over retirement assets increasingly are the most contentious and error-filled part of divorce”, Wall Street Journal. (Eastern edition). New York, N.Y.: Feb 20, 2010. pg. R.4
⁸ Anonymous, “Cracking the Consumer Retirement Code”, (2006), McKinsey & Company. [http://www.mckinsey.com/clientservice/bankingsecurities/latestthinking/cracking%20the%20consumer%20retirement%20code.pdf as of September 15, 2010.]
⁹ Anonymous, “Federal Reserve G.19 Consumer Credit” [http://federalreserve.gov/releases/g19/Current/ as of September 15, 2010.]
¹⁰ Anonymous, “American Housing Survey for the United States: 2007”, (September 2008), Series H150/07. Housing and Household Economic Statistics Division, U.S. Census Bureau. [http://www.census.gov/prod/2008pubs/h150-07.pdf as of September 15, 2010.]
¹¹ Anonymous, “Reverse Mortgages Look Better”, Wall Street Journal (online), New York, NY, June 2010