‘Gray divorce’ cases raise new financial questions for their attorneys.
A recent Bowling Green University study reported that an astonishing 25% of all new divorce cases filed are by those age 55 and older. Is this the result of changing attitudes towards marriage and monogamy amongst the so-called “Baby Boomer” generation?
Regardless of the reason, divorce legal and financial professionals need to sharpen the tools in their toolbox to handle some of the particular financial issues affecting gray divorce.
The first consideration that bears looking at in a new light relates to Social Security income. John, for example, is entitled to receive $2,600 per month at his age 66. Mary, a stay-at-home mom, will receive half of John’s benefit ($1,300) at her age 66 - John still keeps his full $2,600. As long as a divorced couple was married at least 10 years, each spouse is entitled to 100% of their own Social Security benefit or 50% of their spouse’s, whichever is greater. In most states, within the context of divorce, Social Security is viewed as an entitlement, not an asset of either party. Therefore, if one spouse has a larger benefit than the other, that's generally ignored in the overall settlement. To put this into context, if one party retains 100% of their monthly pension benefit, they are generally required to pay the other party an offset from other assets. Of course, Social Security is not assignable in the way that a qualified pension plan is. However, it still constitutes an income source you can't outlive. For an aging couple who had a long term marriage, Social Security income can be a substantial portion of their combined income. Therefore, Social Security income equalization (in the form of permanent alimony) may in some states be considered reasonable consideration in these matters.
Very few people are aware of the many ways to maximize their Social Security income. Divorced couples in particular have access to certain loopholes that can provide enhanced income over their lifetime. One example is that a divorced spouse may be able to collect spousal benefits (50% of their ex's benefit, reduced for early commencement) beginning at age 62. Upon attainment of age 66, they can switch to receiving their own (unreduced) benefit for life. That certainly complicates the question of how to equalize Social Security income via alimony.
Gray divorce professionals need to view the alimony equation through a different lens. In most jurisdictions, it's generally assumed that alimony will cease at “normal retirement age.” However, as life expectancies lengthen, what is the new "normal?" Forget about 65. Many people continue to work well past the age of 70 or 75. The cessassion date for alimony in some states may be a necessary negotiation point in divorce today. Let's suppose that Michael intends to pay Susan alimony until he reaches age 65 (normal retirement age). When he turns 65, he may be surprised to learn that Susan may expect to receive alimony as long as he continues to earn wages. If there's ambiguity in the Judgment of Divorce, the resolution may only be found through post-judgment expenditures by both sides.
Of course, this is just the tip of the iceberg; required minimum distributions, tax considerations and pensions in payout status are other significant financial concerns affecting gray divorce. I'm excited to present with my colleague, Melissa Joy, CFP of the Center for Financial Planning on "Social Security Benefits and Gray Divorce" at the upcoming Divorce Catalyst Conference in October as we delve deeper into the finances of "gray divorce."