by Kathy Costas of EP Wealth and Lisa Zonder of ZFLG
Creating Two Income Streams
If you are nearing retirement while contemplating divorce, you may be anxious about dividing your retirement income stream. While a court indefinitely retains decision-making power over support in long-term marriages (generally over 10 years), that does not mean you are guaranteed to receive spousal support for life. Changes in circumstances such as the payor’s retirement or an illness might result in reduced support or the termination of the support obligation. Here are some key points to consider:
- In certain cases, a lump sum buyout of spousal support may be possible. This requires agreement of both the payor and recipient. If you have an appropriate investment strategy, you may be able to create the income stream you need from the lump sum.
- Do not forget the RMDs (Required Minimum Distributions) from an IRA or 401k that will start once the account holder turns 72. These provide a forced, taxable income stream which should be factored into the cash flow analysis for support of both parties.
- Reach out to the Social Security Administration to determine your benefit and the spousal benefit you may be entitled to. You may be able to claim derivative benefits on your soon to be ex-spouse’s Social Security account, which does not affect that spouse’s benefit. Further, you may be able to begin to receive this income as early as 62.
Deciding How to Best Divide Assets
It is likely that with a long-term marriage, you and your spouse have built wealth together by planning for retirement, not for divorce. In divorce, the simple solution might be to divide those assets right down the middle. However, that may not be the best scenario for either spouse. Here’s why:
- If you are not the primary wage earner, your risk profile and what is valuable to you is very different from that of your spouse. If they pass away, their expenses stop. But for you, it means that income stops but your expenses continue. Liquid assets in bank and brokerage accounts will be more valuable to the spouse with lower earning capability.
- Retirement accounts are terrific but understand if you are under 59 1⁄2 there will be a 10% penalty on top of the income tax on all distributions. Even after that age, all money taken out is taxed as ordinary income so you could lose 30-40% of the value if you take a distribution. Make sure these types of accounts are not your primary source of liquidity or your emergency funds.
- Your home is likely very special to you, but you must make sure you can afford to keep it. Make sure you don’t end up house rich and cash poor, especially if you are living on a reduced, retirement income.
Health Insurance Costs Can Be a Big Factor in Gray Divorce
As we age, our health insurance benefits become a very significant consideration. If only one spouse is on an employer plan, the other spouse could have significantly higher expenses to consider post-divorce. For this reason, many older couples decide to file for legal separation so the non-employee spouse can stay on a company health insurance plan. If legal separation is not an option, make sure you research the actual monthly health care costs for the non-employee spouse. Do not forget your prescriptions, co-pays, deductibles, and other out-of-pocket expenses. And remember, these costs will continue to rise. Medicare and supplemental plans should be explored for those eligible.
Get Professional Help
Now that your long-term plan has been changed by divorce, you need the help of an experienced Financial Planner and Family Law Attorney more than ever. Both EP Wealth and ZFLG take a holistic approach to divorce and are committed to ensuring you have the right team of professionals navigating you through this time.
Kathy Costas, a vice president, investment advisor and Certified Divorce Financial Analyst® (CDFA®) at EP Wealth Advisors in Westlake Village, Calif., specializes in working with men and women going through a divorce. She was appointed by the Institute for Divorce Financial Analysts as the chair of the Southern California chapter of the Divorce Alliance, a group for divorce professionals. She is also the leader of the Conejo Divorce Resources Professionals group. Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions with the appropriate professionals. Content does not involve the rendering of personalized investment advice or legal advice. A legal professional should be consulted prior to implementing anything referenced directly or indirectly. Kathy Costas is not a legal professional and EP Wealth Advisors is not a law firm. Neither is in the business of providing legal advice or legal services. All information presented and services offered are founded under the practices of financial planning.
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