Broker Check

The Financial Wealth Cliff: DIVORCE over Age 50

| December 17, 2020

I put a lot of focus on helping my clients build and protect their hard-earned assets from the unexpected catastrophes in life as well as black swan market events that can wreak havoc on one’s financial well-being. We can’t stop the unknowns such as sudden loss of a loved one or a global pandemic, but we can take action by putting the proper insurance strategies and asset management techniques in place. 

As financially devastating to personal wealth as lack of preparation for an above-mentioned event, in some circumstances it’s not even close to what I consider the number-one destroyer of financial wealth – divorce over age 50.

Divorce at any age can be traumatic and stressful, but the financial impact of couples who divorce over age 50 can be devastating.  Younger divorcing couples with minor children are dealing with support and day-to-day child rearing issues, but often times they haven’t built up a significant nest egg at this point in life.  In youth, TIME is on their side.  Couples over age 50, approaching retirement or retired couples, lack the luxury of time on their side to recoup lost wealth. 

In Texas, divorce community assets are divided in an “equitable” split.  That may or may not be 50% to each party.  So in 2020, let’s assume that a couple has just retired or forced to retire due to COVID-19 pullbacks.  Suppose this couple has accumulated $1.5 million for retirement savings.  This amount may generate approximately $67,500 per year in income plus their individual social security income benefit.  If each party walked away with $750,000 after the divorce, then the equivalent income split would equal $33,750 per year per individual. 

Here’s the rub. The issue is that their personal expenses, specifically housing, will not be reduced by half. Now there are two residences to support, instead of just one. As a result, housing and living expenses increase while individual income decreases.  It’s obvious this has a negative impact on finances, but depending on the lifestyle the divorced couple was used to prior to divorce, trying to “down-size” a lifestyle can be extremely difficult at such an emotional time. In my experience, I’ve seen expenses increase as much as 25-50%.  Sometimes, it’s the emotional spending adding salt to an already open financial wound by adding discretionary purchases such as expensive new furnishings/art for a new residence, fancy new sports car as a sign of vitality, or expensive plastic surgery to try to heal a damaged ego. 

This inverse relationship of income to expenses usually means that the draw down on retirement assets is accelerated.  People tend to take extra withdrawals against their principal balance which in turn exhausts retirement assets faster.  These are assets which typically cannot be replaced with new employment earnings resulting in an exponential risk of running out of money during retirement. 

The high financial cost and wealth effect of a divorce later in life could have a permanent negative effect into retirement years.  It’s imperative to make ongoing deposits into your important relationship accounts.  The bank of “Divorce Over 50” is a tough creditor and may even permanently “close your account.  It’s my advice to take time to invest in your personal relationships as well as your retirement portfolio!