Client getting divorced? here's what advisors should know
In the previous decade, the risk of divorce has more than tripled for those 65 and older, according to the researchers at the Bowling Green State University’s National Center for Family & Marriage Research. Those figures don’t surprise Evelyn Zohlen, the founder of Inspired Financial in Huntington Beach, Calif. Zohlen embraces divorced clients and keeps ties with divorce lawyers who often steer her referrals of such ex-spouses.
The first year or so after a divorce occurs is a critical time for these clients to lock in possible ways to increase their retirement-income forecasts, Zohlen says.
“It may be a good opportunity to do a conversion to a Roth IRA,” she says. Why so? Many new divorcees see in that first year or two a drop in income, and, as a result, they drop tax brackets, presenting perhaps a once-in-a-lifetime opportunity to pay the least amount of taxes on such a conversion, she says.
Even if a Roth IRA conversion doesn’t make sense when you run the figures, the new divorcee needs to recalculate Required Mandatory Distributions from the portion (usually half) of the retirement accounts they now own individually. Unlike when clients inherit retirement accounts, a scenario under which the original account holder’s age matters, the divorcees base their RMD calculations on their own ages, even if their ex-spouses were the original account holders. For clients younger than age 70, that means no RMDs and for others it may mean lowered mandatory distribution amounts, Zohlen says.
If clients expect their incomes to rise in the future, withdrawing more than the government-required amount from their retirement account during those initial post-divorce years in a lower tax bracket may also make sense in terms of long-term planning, she says. Why? Often in the first year or so after a divorce, as clients recover, their income dips. But within five or six years, it may start rising. So during the immediate aftermath of a divorce, a client may take advantage of being in a lower tax bracket than they have been in or may find themselves in the future.
The newly divorced client also should not neglect a possible opportunity to collect spousal benefits from their exes’ Social Security accounts. Yes, say Zohlen and Peg Eddy, a founder of San Diego-based Creative Capital Management, surprisingly, exes share rights to the former spouses’ Social Security benefits. “She, and its usually she, can draw off of his Social Security,” Eddy says. That’s true, even if the former spouse who earned the Social Security credits has multiple former wives (or husbands, as the case may be).
Moreover, the divorced clients don’t have to wait for their exes to apply for those Social Security benefits to apply themselves. “If your ex-husband has not applied for benefits, but can qualify for benefits and is age 62 or older, you can start receiving benefits if you have been divorced for two or more years,” Zohlen says.
Of course, caveats exist. The marriage has to have endured at least 10 years. And, if a divorced client waits to claim the spousal benefit, he or she gets more. For divorced clients, the Social Security spousal benefit is equal to one-half of a former spouses’ full retirement age benefit but only if the client applies after reaching his or her own full retirement age (roughly 66). The divorced client gets only 35% of their exes’ Social Security benefit if he or she applies for them at 62, the earliest age for eligibility.