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How Late-in-Life Divorce Affects Your Finances

Divorce isn’t just a legal matter. You divorce from your spouse in three ways: emotionally, legally and financially.The results of a survey conducted by the Institute of Divorce Financial Analysts revealed incompatibility, infidelity, and money issues as the leading reasons for divorce. According to HRF, 67-80% of second marriages end in divorce.

A trend that financial advisors is seeing is gray divorce, which refers to the demographic trend of an increasing divorce rate for older, "gray-haired" couples in long-lasting marriages. Bowling Green State University conducted research and found the divorce rate among adults age 50 and older doubled over the past 20 years. There are many reasons why people split up late in life such as growing apart, waiting for the children to leave the nest and growing dissatisfaction in the relationship.

Specific Challenges with Divorce Later in Life

Advisors increasingly are encountering clients who are dissolving their marriages in or near retirement. People in a gray divorce face unique financial planning challenges, such as retirement, Social Security, pension income, spousal support, division of assets, adult children, long-term care and estate planning. The most valuable advice is for you to work with the correct specialist. It’s helpful to work with individuals with legal, financial and emotional expertise. (For more from this author, see: 5 Tips for Cutting Divorce Costs.)

In a traditional divorce, couples with children would have the stress of child support and custody arrangements. Unfortunately, a big stressor for gray divorce is dealing with the marital home that a couple has shared for decades. Traditionally, the home would either be sold and the equity divided or one spouse would buy out the other. This arrangement often requires mortgages or cash distributions from the portfolio. Divorce causes financial planning implications because one or both parties will need to find suitable housing arrangements.

The Home Equity Conversion Mortgage

For individuals who qualify, the Home Equity Conversion Mortgage (HECM) provides two options that may restore desirable housing to both spouses. By providing financing without a monthly debt requirement, the couple can benefit from comparable housing without necessarily having to disburse assets from a retirement account. Retirement income security can be improved without drastically lowering the standard of living for a divorcing couple.

The first option is to use a HECM, the FHA-insured reverse mortgage, and place it on the marital home. This provides money for the person who is moving by providing a substantial down payment on a new home. A second transaction occurs on the departing spouse’s new home, which will combine that down payment with a home-purchase HECM. The HECM for purchase reverse mortgage actually finances the rest of the cost of the home. Therefore, there is a higher probability of both spouses retaining homes of equal value, but without monthly debt or a significant withdrawal from either portfolio. (For more from this author, see: 5 Ways to Use Your Home to Retire.)

The second option is to sell the shared home and divide the proceeds. Each spouse can use his or her share to cover the down payment on a new home and use a home-purchase HECM to finance the rest. Again this may reduce or eliminate the need to take money from either spouse’s investment portfolio while enjoying comparable housing and avoiding mandatory mortgage payments.

Divorce happens. It can be emotionally and financially traumatic, but with longer life expectancies and a knowledge economy, it does not have to compromise financial security in retirement. (For more from this author, see: What Is Strategic Asset Allocation?)