This scenario is very familiar to
boomers: a couple, married 30-plus years, with three great kids, maybe some
grandkids, living in a beautiful home and nearing retirement call it quits and
head to divorce court.
Baby boomers turned empty-nesters
are increasingly filing for divorce as they find themselves no longer happy
with the partner they have spent so many years with.
New research by sociologists Susan
Brown and I-Fen Lin of Bowling Green State University find the divorce rate
among people 50 and over continues to increase. For new baby-boomer empty
nesters, the divorce rate has doubled over the past two decades with 1 in 4 now
getting divorced.
Getting divorced later in life can
impact boomers’ financial situations in a very complex manner especially when
it comes to dividing retirement accounts.
According to Howard Hook, a
certified financial planner with EKS Associates in Princeton, N.J., when it
comes to aging and finances, the cards are often stacked against
singles -especially newly-solitaire boomers.
Hook offered the following advice
to suddenly-single boomers on how they can best protect their assets and navigate
their finances when in or approaching retirement:
Boomer: What disadvantages would
suddenly-single baby boomers encounter in terms of taxes and deductions?
Hook: Suddenly-single baby
boomer will be paying a higher percentage of tax on their income compared
to married boomers.
Here’s an example:
Two households both earning
$150,000. Household A consists of a single baby boomer and Household B consists
of married baby boomers. Household A will pay 19% more federal income tax than
Household B.
The tax code is written such that
more of the taxable income for a household consisting of married taxpayer’s is
taxed at lower rates than the taxable income in a single household’s taxable
income.
Another disadvantage for singles is
the potential loss of certain tax deductions that may have been taken while
married. For example, someone who received the primary residence as part of a
divorce settlement would continue to take a deduction for property taxes while
the person not receiving the home as part of the settlement would not be able
to take the deduction unless they bought another home.
Boomer: What retirement
strategies do newly-divorced boomers not have that are available to married
people?
Hook: The ability to stretch
pension benefits over more than one life span.
Companies that offer a pension plan
for their employees many times do not allow an un-married person the option of
paying the pension over “joint lives”, an option available to a married
employee with their spouse. This can be harmful for a recently-divorced person
who may be financially supporting a sibling or an older parent who wants
reassurance the relative will be taken care of if they pass away.
Singles also lose the ability to
maximize the amount of money saved in a qualified retirement account such as a
401(k) or 403(b).The maximum contribution for someone over age 50 to a 401(k)
plan is $23,000 (in 2013). A married couple where both spouses are eligible for
a 401(k)plan can contribute twice the amount or $46,000 in total.
Boomer: Why do you find
that newly single boomers are largely ignored by financial professionals and
how can they get the financial assistance they need?
Hook: There is a
misconception that certain planning strategies do not apply to single people.
For example, one of the reasons for
someone to buy life insurance is to provide for a surviving spouse’s needs.
There may be an assumption that without a spouse, the single boomer may not
need life insurance. This may have been true many years ago, but today, many
people find themselves caring for older family members or domestic partners
that would need the life insurance.
One of the most common estate
planning strategies to reduce estate taxes is for spouses to create trusts for
each other’s benefits in order to maximize the amount of assets that can pass
to their beneficiaries free of Federal and / or state estate tax. For a boomer
with no spouse, there may be a presumption that there is no need for this
trust. However, there are other, non-tax reasons to create trusts (creditor
protection, control of timing of distribution of assets after death are two),
that make the inclusion of a trust for a single person as important as for a
married person.
Boomer: What happens with joint
credit cards and installment loans, how can single boomers best deal with these
financial burdens?
Hook: Much depends on the
divorce agreement as to who is responsible to pay these debts. Proper planning
before the divorce is finalized is crucial to dealing effectively with these issues.
If the single boomer is saddled
with paying debt, care should be taken as to how to pay off the debt. If
current income is not sufficient to do so, then the assets received in the
divorce become important. Non-liquid assets (such as a home) or retirement
assets are not particularly good assets to use to pay off debt. Paying off debt
by refinancing a home may make sense, but may not be possible depending upon
the ability to qualify for a mortgage. Taking distributions from retirement
assets is tax inefficient as taxes need to be paid on those distributions,
causing more money to come out of the account to pay the tax than needs to be
taken to pay down the debt.
If assuming debt is part of the
agreement, then a portion of the assets received in the divorce should be
liquid assets not located in retirement accounts.
Boomer: What should
suddenly-single boomers take into financial consideration before selling the
home they have jointly owned for 20-plus years?
Hook: When selling a home,
boomers need to take into consideration the costs of a new home and the taxes
that will be incurred upon selling the existing home.
Someone who has not purchased (or
rented) a home for more than 20 years may not realize the increased costs
associated with the initial purchase of a new home (closing costs, repairs and
maintenance) as well as the ongoing costs of a new home (property taxes,
utilities, etc.)
Income taxes on the sale of the
home are also important and tricky. The tax code allows the first $500,000 of gain
on the sale of a home considered to have been the primary residence of a
married couple in two of the previous five years. This exclusion is only
$250,000 for a single taxpayer. Therefore, if the boomer who is about to become
single intends to sell the home, it may make sense to do so in a tax year that
they can still file as married with their spouse. If this is the case, the
single boomer receives the proceeds from the sale. The amount of the exclusion
is dependent upon the marital status of the single boomer at the end of the tax
year in which the home is sold and not the marital status at the date of sale.
Therefore, it may be necessary to delay the final divorce agreement until after
Dec. 31 of the year of sale to take advantage of the $500,000 exclusion.
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