Divorcing is Tough. What if You’re about to Retire at the Same Time?
Divorce is certainly something that is never easy. No matter what stage of life you’re in, or what your plans were for the “next phase,” typically divorce for most means living a life very different than what was originally imagined. Not to mention the pain of letting someone go. But while divorce is always hard, it can get even tougher if you’re facing retirement. This is because divorce is very costly; and retirement is typically a time when people are trying to figure out how to live on significantly less than what they’re used to.
“Divorce can have a major impact because you can have a situation where people’s expenses have literally doubled because now there are two households,” says Christine Van Cauwenberge, director of tax and estate planning at Investors Group, based out of Winnipeg.
And she says, if the couple is retired then there often aren’t a lot of savings to draw on.
“If the parties have already retired, then it’s very difficult to make a big difference in terms of how much you can save. It’s more likely you can’t save very much at all anymore because you’re in a drawdown phase of your life.”
That unfortunately, will have a major impact on the quality of life for many retired divorcees, says Tesia Brooks, a certified divorce financial analyst with Brooks Financial, also based out of Winnipeg.
“In your 50s and 60s, you’re pretty close to retirement and you’ve done those plans together, thinking this is what your lifestyle will be like,” she says. “Now you’ve got to split the plan into two households and you’re pushing retirement, and if there are shortfalls, someone may have to go back to work, delay retirement or have a lower standard of living than envisioned.”
And Darren Quiring, financial planner with the Winnipeg office of Edward Jones, says that in addition to having more expenses and fewer savings, those who have been retired for some time and then divorce face an additional disadvantage: losing out on their partner’s government-funded retirement income.
“As a single person, you’re at a disadvantage because your partner was also often bringing in OAS and CPP, and that’s approximately $15,000 a year,” he says. “Over a 20-year period, your financial plan is out about $300,000.”
But it’s not all terrible, nor is divorce all about forking over money. Of course, often times some partners are entitled to support payments, as well as division of assets when they go through a divorce.
“You may be entitled to apply for support, whether you were common-law or married,” says Van Cauwenberghe, a family lawyer. “Spousal support would certainly come into play when one spouse has been at home with the children and ended a career or took a long pause in that career so he or she is behind income-wise.
The support is usually to give that spouse a period of time to get back into the workforce earning money.”
But, he also warns, if one spouse is going to try to get this type of support, it should be done so as soon as the divorce proceedings have started, if not sooner.
“The longer you wait the more is at risk because you may lose out on certain thing,” he says. “Even with support, if you don’t file for support for two or three years the court is going to wonder whether you actually need it because it doesn’t appear there was much dire need to begin with.
Cauwenberghe says that this is because spousal support is meant to give one spouse time to get back into the workforce if they had spent most of their married life at home. It’s also because of this that can actually make it harder for individuals headed into retirement to get that support.
“When it’s a 55-plus divorce, it’s harder at that age to get back to being gainfully employed or equal to what other the other person is doing,” he says.
But even without support, one or the other spouse may have money coming to them – or owed by them. This is in the way of assets and debts, which ideally are split 50/50 but is not always the case.
Ms. Brooks suggests that when the situation becomes complicated, such as a choice between dividing up RRSPs or a keeping the house in a divorce, individuals should always seek separate financial advice.
“A $300,000 house, which is subject to the principal-residence exemption and is not going to really have any tax owing on it when you sell it, will likely be worth a lot more than a $300,000 RRSP, which is 100 per cent taxable,” says Brooks.
But she also says that this isn’t necessarily always the case for everyone, and this is why sound financial advice from a professional is so important.
“If you take the house, you could be house-rich and cash-poor, not a good situation to be in,” she says. “The equity in the house can’t buy you groceries.”
Brooks also says that you must weigh each scenario, and the pros and cons that go along with it, carefully. Do the math, and simply see where the numbers make the most sense. Unfortunately, she says, it may even turn out that it doesn’t make any sense at all to pursue assets or quibble or the division of them. This, she says, will come through if you take the time to break down each situation.
“I sometimes tell clients that they could end up spending a lot of money on lawyers,” she says. “Do you really want to spend $20,000 to gain an extra $30,000?”
And it’s no wonder that Brooks, along with these other professionals, have been speaking to so many clients about divorce and retirement lately. According to Statistics Canada, the amount of “grey divorces” is on the rise, with the average age of divorcees climbing to somewhere in the early to mid-40s.