"Gray" Divorce

By Andi McNamara, CFP^®
Vice President, Director of Financial Planning
Washington Trust Wealth Management

Life often doesn’t turn out as planned, and one of the most profound curve balls can be transitioning into a single lifestyle later in life due to divorce. Finding yourself unexpectedly single is not only emotionally difficult—it brings with it some serious financial implications that can impact the rest of your life.

Transitioning your financial plan from two people to one requires a strategic, intentional approach to safeguarding your financial future. It’s not just about numbers; it’s about defining your life goals—taking into account your age, financial assets, income source, liabilities, and long-term objectives—and ensuring that your plan can get you there.

Don’t go it alone.

As you are facing the end of your marriage, your first step is consulting a qualified wealth advisor who can help you navigate the financial complexities and make important decisions during an emotional and stressful time. Even if the divorce is amicable and the division of assets seems straightforward, you still need someone on your side, looking out for your best interests.

Here are some areas that you should be reviewing with your wealth team.

Tax Status

Your tax status will change after divorce, impacting your overall financial picture, including your income, deductions, and potential tax liabilities. Your wealth and tax advisor can help you optimize your tax situation and ensure you are taking advantage of available deductions and credits.

Social Security

Marital status can impact Social Security benefits, so you need to carefully review your options. If you were married for at least ten years, you may be eligible for benefits based on your ex-spouse's earnings record. Understanding your Social Security options and when to claim benefits can significantly impact your retirement income.ⁱ

Estate plan documents

When facing life as newly single, it is critically important to review all major documents in your estate plan (e.g., your will, health care proxy, trusts) to ensure your marital status, beneficiaries, and other relevant information are up to date.

Retirement Plans

Divorce complicates retirement planning, especially if you and your former spouse have shared retirement accounts or one or both have pensions. Most retirement plans have procedures that must be followed when dividing retirement assets; failure to follow them could cost you those assets, even if they were agreed upon in the divorce decree.

Qualified Domestic Relations Order (QDRO)

In many divorce cases, a Qualified Domestic Relations Order (QDRO) is necessary to divide qualified retirement assets, such as 401(k), 403(b), and pension plans. This court-approved document establishes the right of a spouse to receive a portion of retirement plan and pension benefits.ⁱⁱ

Pension Annuity Options and Maximization

A pension earned while divorcing spouses were married is typically considered joint property in most states. If a spouse has not yet retired, before finalizing a divorce, it is important to have your wealth advisor run the numbers for pension options to help you avoid making irrevocable decisions that can cost you for the rest of your life.

Pension Annuity Options

• Single Life Annuity: Provides regular pension payments for the lifetime of the pension holder. Payments cease upon the holder's death.
• Joint and Survivor Annuity: Provides reduced pension payments during the pension holder's lifetime but continues to pay a portion to a surviving spouse or beneficiary after their death.
• Lump Sum Payment: Allows the pension holder to receive the entire pension benefit as a one-time, lump-sum payment, providing more control over the funds.ⁱⁱⁱ

Pension Maximization

Opting for a joint and survivor annuity can provide financial security for a surviving spouse but may result in lower initial pension payments. In pension maximization, the pension holder chooses between taking a higher pension benefit with no survivor's benefit or a lower pension benefit with a survivor's benefit. Does the joint survivor option work best for you? Or will your savings, investments, and life insurance allow you to take the no-survivor benefit? Your wealth advisor can guide you in making those decisions—and ensure that the beneficiary can’t change.

Washington Trust Wealth Management is here to help.

We understand that divorce is a difficult, emotional time. We’re here to walk through this journey with you, making the transition much less painful and helping to safeguard your financial future. We can help you make informed decisions about your financial future, developing a personalized wealth plan tailored to your specific life circumstances and goals and bringing some peace of mind.