“Generally retirement plans fall into one of two categories – defined benefit or defined contribution plans.”
Over the last 20 years, the U.S. divorce rate has been dropping. However, divorce among spouses over 50 has doubled since 1990! The surge has spawned the term gray divorce for these older divorcing spouses. While many of the issues are similar to their younger counterparts, there are unique issues in gray divorces including the availability of Social Security benefits, probability of open ended spousal maintenance and division of retirement assets.
According to the SSA, a person 62 or older who is unmarried and was in a marriage that lasted 10 years or more can receive benefits on their ex-spouse’s earnings record even if the ex-spouse remarried; the ex-spouse needs to be entitled to SSI retirement and/or disability benefits; the person will receive the larger of his or her own work benefit or the spousal benefits of the exspouse’s work record at full retirement age (FRA); the person will receive a combination of his or her benefits and the excess spousal benefits on the exspouse’s work record if claimed before FRA; even if the person seeking benefits has remarried, they are still eligible if that later marriage ended by death, divorce or annulment; and if the exspouse has not applied for retirement benefits, but qualifies for them, the person can receive benefits of the exspouse’s earnings record if they’ve been divorced for at least two years.
Because of the financial impact, understanding the benefits available and the choices that need to be made are critical in a gray divorce. For example, a divorced spouse might optimize his or her Social Security by beginning their spousal benefit at FRA (age 66 for those currently applying), and then switching to their own benefit at age 70. Because benefits go up by about 8 percent a year between the ages of 66 and 70, waiting to collect on their own benefit could mean a significantly higher payout down the road. The divorcing senior needs to recognize that if he or she decides to take the spousal benefit before they reached FRA their benefit will be permanently reduced by 7-8 percent for each year leading up to their FRA (a full 30 percent reduction on the spousal benefit at age 62).
There is a difference in survival benefits as well. If a person is 60 or older and was married for 10 years or longer, he or she would be entitled to their deceased ex-spouse’s Social Security payout just like a widow or widower. This person could even have remarried and still collect the benefits as long as they didn’t remarry until age 60.
In a gray divorce, particularly where neither spouse is working and they both must survive on fixed incomes, being able to boost income with the spousal benefit can make a real difference.
If one spouse is still working, the nonworking spouse is virtually guaranteed a spousal maintenance award unless the divided assets generate sufficient income to meet the reasonable financial needs of the non-working spouse without further financial assistance. Since people are now working longer, spousal maintenance has become more common in gray divorce. While there is no formula or guideline to govern the amount and duration of an award of spousal maintenance, where the parties have been married for at least 20 years and the person seeking maintenance is at least 50, Arizona case law supports an open-ended award of spousal maintenance.
By statute an award of spousal maintenance ends with the death of either spouse or the remarriage of the recipient spouse. Except in those cases where the parties agree that the spousal maintenance award will be non-modifiable, an award of spousal maintenance is presumptively modifiable. Therefore, either spouse could seek to modify or terminate the award if there is a substantial or continuing change in circumstances. If the pay or spouse enters retirement or disability, he or she is sure to seek modification or termination of the open-ended award.
Commonly an older person is reluctant to commit to an open-ended award of spousal maintenance. One of the options commonly explored in those situations is an unequal division of community assets to compensate the recipient spouse for agreeing to something other than an open-ended award of spousal maintenance, including retirement assets.
Generally retirement plans fall into one of two categories – defined benefit or defined contribution plans.
In a defined benefit plan – a pension – the amount payable to a person at retirement is usually based on a formula that takes into account the number of years employed and their salary. All benefits earned during the marriage are community property. Often a portion will be considered the spouse’s separate property, earned prior to marriage or after date of service. A calculation must be made to determine the amount that is community. Special orders are then required in order for a portion of that benefit to be paid directly to the exspouse of the participant.
A defined contribution plan – most commonly a 401(k) – places an employee’s contributions and usually matching employer contributions in a tax-free retirement account to grow until retirement. If a person participated in such a plan prior to marriage or after the date of service, calculations will need to be made to determine the amount that is community property. In order for this plan to be divided, it is necessary for a dividing order to be entered. This is separate from the decree of dissolution and is usually entered after the decree is entered by the court. There are many nuances to a dividing order, counsel should be cognizant of such issues including providing adjustments for market gains or losses. The risk of agreeing on a set sum without market adjustments, may leave the plan unable to pay a set sum due to market losses.
While there are other issues that are in gray divorces, Social Security benefits, spousal maintenance and the division of retirement plans are the most common.