Last week’s blog addressed “Grey Divorce” – divorce which occurs late in life – from the breadwinner’s perspective. This week I focus on the issues the non-breadwinner (the spouse who is the lower or non-income earner) must consider in his or her Grey Divorce.
The issue of supporting late-in-life children is a financial concern for the breadwinner and the non-breadwinner. The breadwinner can have the conflict of needing to financially support children while either facing actual retirement (forced or voluntary) or planning to aggressively fund retirement in the final working career years (typically with the highest income). The non-breadwinner is faced with these same concerns plus the possibility of having to re-enter the workforce late in life. In California, child support is of primary importance in divorce, often taking precedence over a parent’s retirement plans or desire to be a stay-at-home parent. Therefore, the non-breadwinner, the same as the breadwinner, may need to consider a reduction in current living expenses to live within possibly reduced income if or when the breadwinner retires. To supplement the child support often received from the breadwinner, the non-breadwinner may need to seek re-training or additional education to meet the current workforce’s demands. This can be a very big shift in life for the non-breadwinner, but may be a reality. Facing this reality sooner rather than later is best.
Compared to child support, spousal support is not formulaic. There are many factors which must be considered in determining spousal support, including each spouse’s expenses – which can include a history of saving (i.e. funding retirement). The non-breadwinner should include any history of savings as part of his or her needs, thereby requiring the breadwinner to continue funding the non-breadwinner’s retirement plan. This of course is problematic if the breadwinner has retired and has reduced income. As with the child support situation just discussed, the non-breadwinner may be expected to re-enter the workforce. Depending upon the non-breadwinner’s age, history of employment and level of education, this may be extraordinarily difficult. The non-breadwinner is expected to make good faith efforts to be self-supporting, typically for one-half the length of time that the marriage lasted. The mechanics and reality of this expectation vary from case to case. If re-entering the workforce is not a possibility (due to age and/or health), the non-breadwinner may be faced with a significant reduction in his or her standard of living – especially if the breadwinner has retired or faces his or her own health issues which have impacted employability. Insurance can mitigate some of these financial concerns for the non-breadwinner. Possibilities include purchasing long-term care insurance, and possibly disability insurance covering the breadwinner to provide a continued source of income which can be used to help support the non-breadwinner.
Also distinct from child support, the breadwinner can take a tax deduction for the payment of spousal support, which means the non-breadwinner must pay taxes on spousal support received. If the spousal support deduction is not important for the breadwinner, a non-taxable spousal support arrangement may be negotiated. This usually means paying a lower amount of support to account for the reduced tax liability for the non-breadwinner spouse and the lost tax benefit for the breadwinner. This type of agreement depends upon how the property settlement is structured.
Health Care Costs
Another difficult economic reality in Grey Divorce is that one or both parties often have increased health care and insurance expenses. These expenses are mostly met from the breadwinner’s income. If the breadwinner becomes unemployed, he or she may not be able to afford to contribute toward the health insurance expense of the non-breadwinner. Exploring ways to mitigate these expenses is critical. Options to examine include long term care insurance, group health insurance, government-aided health insurance, disability insurance, Social Security benefits, liquidation of assets (for example, selling real property or accessing retirement plans), and reduced living expenses. Another option for the non-breadwinner is to re-enter the workforce and get a job that provides group health insurance. The expense (if any) is typically quite low and there is no medical qualification for the insurance. This is often the most important reason for the non-breadwinner to re-enter the workforce later in life.
The non-breadwinner must realistically evaluate his or her expenses, the likelihood of employment and possible sources of income such as Social Security benefits, pension / IRA distributions, and reasonable rates of return (interest and dividends) on investable assets. A financial planner can assist with a projection of these figures. This analysis will help the non-breadwinner to decide which assets in the divorce are most important to provide income. Often, the most difficult decision for the non-breadwinner is whether to keep the residence. The decision typically depends upon the ability of the non-breadwinner to afford current obligations (mortgage, taxes, insurance, monthly maintenance) and future repairs. Other factors include the mortgage obligation itself (an adjustable interest rate may increase, requiring higher payments) and the cost of replacement housing. The fate of the family residence is often fraught with emotions, but deciding whether to keep it as part of a divorce settlement should depend on business considerations, not emotional ones. The non-breadwinner who accepts the financial commitment for the residence must also understand that selling it after the divorce brings sole responsibility for paying any sales cost and any capital gain taxes. Thus the non-breadwinner who sells the house soon after the divorce has in reality accepted a much lower property settlement and may be financially worse off than if he or she had not kept the residence.
The non-breadwinner must face the possibility that he or she may never receive any future assets or income other than what is awarded in the divorce. A settlement sufficient to meet estimated current and future financial needs is obviously preferred but may not always be possible. The non-breadwinner must be realistic about his or her financial future and work to make the best decisions possible given that reality.