The article “Divorce over 50: managing your finances if you find yourself single in the run-up to retirement” was originally published in MoneySense on July 28, 2021. Photo by Pavel Danilyuk from Pexels.
“Grey divorce” is on the rise—and it can have significant financial impacts, from daily cash flow to tax planning and retirement savings.
Divorce is certainly not new—but what’s emerging as a trend is the choice to split later in life. Dubbed grey divorce, these marital splits, happening close to or in retirement, are reportedly on the rise, and they can have a significant financial impact.
Married couples are generally subject to a division of their property when they split up. The rules differ slightly depending on your province or territory of residence, but for couples who have been married for a long time or who accumulated most of their assets while together, a relatively equal division may result.
There can be other considerations, however, like spousal or child support. Couples who are close to retirement or already retired may not have child support obligations, assuming their children are independent adults. Spousal support could still apply but may not be as significant as with a younger couple if one or both parties are near the end of their career or no longer working.
In some provinces or territories, common-law couples are treated the same as married couples, but that isn’t always the case. Assets may or may not be subject to division, and other factors may impact support obligations.
Some pensions can be more complicated to split than other assets that are easier to value. A defined contribution (DC) pension is a mutual fund account that has market value, and that can change as the market fluctuates. A defined benefit (DB) pension that pays a specific monthly benefit to a plan member may be eligible to pay a portion to each spouse; but in the case of a split that happens before payouts begin, the pension may need to be given a current value based on a complicated set of assumptions.
Family law advice should be sought for anyone going through a separation or divorce. Other professional advice related to tax implications of assets and income is also important, given $100 of tax-deferred RRSP assets may be less than $50 after tax, so cannot be compared to $100 of tax-free TFSAs or $100 of tax-free principal residence real estate.
Working with collaborative family lawyers or mediators may result in the best and most efficient financial outcome for both parties. Divorce, after all, is not a zero-sum game where if you win, your partner loses. The financial cost of legal advice and litigation can be significant and hurt both parties, especially with finite assets to fund retirement.
Handling fixed expenses as a single retiree
One of the biggest problems with divorce for pre-retirees and retired couples is that when you divide assets, that does not necessarily mean you also divide expenses. A 50% reduction in retirement assets does not also come with a 50% reduction in retirement costs, and there are a lot of fixed expenses for a household, whether it is a household of two or one. Divorcés may find their expenses are still much higher than half what they paid as half a couple, despite only walking away with 50% of their combined marital assets.
Separation as part of your retirement plan?
Retirement planning is an important exercise for couples; it should be done well ahead of retirement and particularly as that stage of their lives looms closer. Asking your spouse if they want to split up may not be a common retirement planning consideration but it is also not a totally unrealistic concept.
When you become an empty nester, it can introduce a degree of uncertainty to your partner relationship and your role within it. The same can happen at retirement. Any pre-retiree, single or married, should be thinking about how they are going to spend their golden years. Couples should be talking about how they want to spend that time, even if it results in the realization that they may not want to spend it together. At best, it could help them address challenges ahead of time to ensure a happy retirement together. At worst, “the talk” could accelerate a split, but the earlier that becomes apparent, the sooner and better they may both be able to develop their retirement plans on their own while they are still working and preparing to retire.
Does it make sense to keep the house?
In the event of a divorce or separation, one party may want to stay in the couple’s home. This could result in giving up a larger share of investment assets or pensions to instead walk away with a house or condo, or it could result in having to take on a mortgage to buy out the other spouse. Before making this choice, it is important to consider the long-term financial implications, whether you can afford to stay in the home and how best to fund it. Using debt to pay out a spouse is not necessarily a bad decision—especially now, when interest rates are low—if there is a clear plan to sell or downsize within the next few years anyway.
If you decide not to stay in the home you shared with your spouse, there is a good argument for renting a home or condo after a separation or divorce rather than rushing to buy something. The reason is that land transfer tax, real estate commissions and moving costs can be expensive if you buy and subsequently sell again in a short period of time. Renting initially before determining the next step may be preferable at any age or stage, and can often be the better choice financially. It can also help free up capital to fund retirement spending as well, particularly for those less concerned about leaving an estate.
Tax challenges for single retirees
Some of the potential tax and estate strategies available to spouses, like pension income splitting and a tax-deferred rollover of registered assets like RRSPs or RRIFs, are not available for single retirees. It can make tax reduction harder for singles than couples as well.
Divorce can be an unfortunate situation for the couple involved, their children and others around them. It can turn out to be better for both spouses emotionally. Financially, there are short-term implications, like dividing assets and where to live. In the long run, retirement funding can be more expensive for singles, and it’s important to ensure you can decumulate your assets efficiently without outliving your money.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.