The Rise of the “Gray Divorce” and Financial Moves to Make — and How It Impacts Retirement

Divorces are always financially disruptive, but a divorce late-in-life can create unique financial challenges, especially for those already nearing or in retirement. The term “Gray Divorce” was first coined by the AARP in 2004.  It describes the separation of couples typically over 50, frequently after many years of marriage.  While divorce rates have fallen in the United States over the last 40 years, Gray Divorces have become increasingly more common and today they represent more than a third of all divorces, according to the New York Times. 

Why are Gray Divorces becoming more common?  There isn’t a single reason, but common drivers include longer life expectancies, changing social norms, greater financial independence, and a desire for fulfillment later in life. 

The first unique challenge is a reduction in retirement assets, previously designed to support a single household.  Post a Gray Divorce, the retirement assets are often divided, creating significantly smaller nest eggs to support two households and limited time to rebuild savings to support long-term retirement.  Similarly, two households are more expensive than one and living expenses are greater, on a per-person basis, creating additional strain on retirement assets. 

Secondly, Social Security and health insurance decisions can become more complex and costly post-Gray Divorce.  While many divorced spouses can claim Social Security benefits on their ex’s records, the marital length, the timing of the claim, and the order in which you make the claim all play a factor.   A misunderstanding of the Social Security rules could reduce lifetime benefits.  Likewise, loss of employer-provided spousal healthcare coverage could create the need for expensive private insurance to bridge the gap until Medicare, for those under 65.

To combat some of these challenges, the most important move you can make is to surround yourself with a coordinated team of professionals, as early as possible. These should include a divorce attorney, a financial advisor, and a tax professional.  Other professionals to consider include a Certified Divorce Financial Analyst (CDFA), Forensic Accountant, realtor, insurance specialist, Social Security specialist, and business valuation expert (if applicable). 

With a strong team in place, you should create a comprehensive inventory of all assets, debt and income. These include (but not limited to) retirement assets, pensions, insurance cash values, real estate, and credit lines.   Be sure to understand the ownership structure (marital or separate) and the associated valuation before starting any negotiation.  During negotiation, try to limit emotional decisions as they can lead to costly mistakes.

Once you agree on how your assets are going to be divided, the next step is to run an updated plan that projects your retirement after the divorce with new income, expenses, and savings levels.  This is where the tradeoffs become clear, forcing you to perhaps delay retirement, adjust spending, or increase savings.  You might also have to adjust your investment strategy and/or re-evaluate your risk tolerance. 

After the divorce is finalized, the final step is to revise your estate plan, including wills, powers of attorney, and healthcare directives to match your post-divorce wishes.  Just as importantly, check the beneficiaries on your IRAs, 401(k)s, and insurance policies, to reflect your new reality, especially if you plan to remarry or support adult children differently.

Gray Divorce doesn’t have to derail retirement, but it does require adjusting your plan for a longer, more individual future. The earlier the financial picture is clarified, and the retirement strategy is rebuilt, the more control you can regain.   Not just control over your resources, but over the life that the resources are meant to support.