De-coupling AKA divorce can be taxing on our health and our wealth. While divorce rates among most ages have been trending down for some time there is a growing shift in the older adults demographic with a shocking rise in divorce rates. Divorces are more than doubling in rates for clients over the age of 50 and nearly tripling over the last 20 years for clients over the age of 65! If you thought you were over the marital divorce hump, statistics may say otherwise.
Many things get better in life when they have time to age. Good wine, a really nice steak and our wealth all tend to age nicely. Divorce, not so much. Aside from the emotional roller coaster associated with separating our lives from someone we may have spent decades with, divorce comes fraught with implications on our retirement planning and financial health. It’s one of the most disruptive life events we may face in our senior years, so much so it’s spawned financial services designations like the CDFA (Certified Divorce Financial Analyst) and its own nicknames, the grey divorce or silver divorce.
By the way, what ever happened to the Golden Years? When did they turn silver or even worse turn to grey? Between long term care, divorce and the impact of poorly timed market corrections has retirement really turned so bleak as to become grey. We hope not. Facing a challenge with divorce in retirement? We can help keep it a little more golden here at the Wellspring Group.
So why can divorce be so disruptive to retirement? The costs associated with settling a divorce can be astounding. The splitting of financial assets can make it challenging to separate and maintain standards of lifestyle. Divorce can interrupt our lives at very inopportune times. Murphy’s law, anyone? Liquidation of assets in down markets can hamper long-term investment returns. Illiquidity for our retirement savings can be created by poorly managing which assets are split between the (now) two households. Social security planning and long term care planning can be impacted and have negative implications on our established financial plan. The list can likely go on. If you’re interested in more, you may want to contact a local CDFA (Certified Divorce Financial Analyst).
When we are young we are much more capable of recouping our losses and adapting our plans as we have more time on our side to create a financial recover. However, like most events in retirement planning however, the closer we are to retirement or the further we are into it, the much more likely we are to be forever impacted by change in financial circumstances from a divorce. In essence, we grow less flexible as we age not just in our health but also in our wealth.
A reverse mortgage or maybe even two can truly help many older adults who are in the process of divorce. It can potentially allow one of the partners to remain in their home and still relinquish equity to the partner moving out. In other words, here we can split the house without having to sell our home in a fire sale. For instance, a $400,000 house could finance a reverse mortgage that could provide up to $200,000 of home equity to the former spouse leaving the home, while the other remains in the home they were already occupying. The spouse opting to leave can then purchase a new home with the proceeds from the Reverse Mortgage on the prior residence and finance a reverse mortgage for the difference.
Another option would be to sell the large home the couple once shared. Then split the proceeds and finance a new purchase for the difference between the purchase price and the proceeds from the home sale. With approximately 50% down both clients could maintain the same style of comfort and home they are used to without creating potentially disastrous cash flow issues late into retirement by using a traditional mortgage. In this scenario (we are illustrating without the costs of selling a property or tax implications to show how it can work) the home is sold, both clients have $200,00 in equity and they can each leverage that equity to purchase homes up to approximately $400,000 in value thus keep the lifestyle they had grown accustomed to and hoped to maintain in retirement.
The reverse mortgage as a divorce tool is not appropriate for everybody. As it stands, having a house paid off or one with substantial equity is essential to both the examples illustrated above. Making sure that the home is a forever home is also a consideration on deploying a reverse mortgage. Divorcing spousal cooperation will likely also come into play in these considerations.
In many instances the reverse mortgage can be a powerful tool to use in the silver divorce scenario. We need to consider all of our available resources to help mitigate the potentially devastating financial impact of divorce close to or in retirement. Home equity is a piece of the financial planning and retirement puzzle, using it to provide security, stability and to solve the financial ramifications of a divorce in our latter years can prove useful.