By: Sharon Ho, featuring our advisor Debbie Hartzman, CFP, CLU, TEP, CDFA
The marriage vow “til death do us part” is less true for seniors today. For advisors, that means managing more clients going through divorces later in life. Rick Peticca, an associate lawyer at Shulman Law Firm in Vaughan, Ont., says he’s seen a significant increase over the last decade in the number of people over the age of 60 getting what are sometimes called “grey divorces.”
In 2008, the last year StatsCan collected annual divorce data, 9,445 people between the ages of 60 and 79 became divorced. That’s up from 5,270 in 1990, even though the total number of divorcees declined in 2008.
Debbie Hartzman, a CFP at Hartzman & Associates in Kingston, Ont., says divorces commonly occur aer children have le home and couples nd they’re miserable living together.
Divorcing later in life can seriously impact one’s finances, and introduces a range of issues for advisors to address around pensions and retirement planning.
Dividing retirement income
Divorcing seniors “are probably in the drawdown stage of their assets as opposed to [the] growth stage,” which generally means facing a lower standard of living, says Hartzman, who is also a Certified Divorce Financial Analyst.
It doesn’t matter if one spouse was the main income earner during a marriage if the couple separates in retirement, she adds. The assets they have at that point are matrimonial assets, so “they’re both sitting on the same playing field.”
“Generally, if there is income coming into the matrimonial unit, then it is to be shared,” Hartzman says. (An inheritance that one spouse receives during the marriage is an exception.)
“If there is no income flowing into the matrimonial unit and the assets are equalized, then each has to rely on the equalization of those assets to support them going forward as they would have if they were a unit.”
Seniors don’t necessarily have a large income if they’re relying on a company pension, CPP and OAS. Less income means few divorcing seniors provide spousal support, says Peticca. If the couple’s retirement incomes are comparable and modest (e.g., gross $50,000 to $60,000 annually), then the amount of support would be little to nonexistent.
If spousal support is to be paid, then pensions are treated as income and as an asset, Peticca says. Support is taxed as income for the recipient and calculated as a tax deduction for the payer.
CPP contributions made during the time a couple lived together can be equally divided after a divorce, which is known as credit splitting. Credits can be divided even if one spouse didn’t make contributions. Credits can’t be divided, however, for the period after one spouse turns 70.
Couples getting divorced in their seventies also face RRSPs that have to be converted into RRIFs at 71, Hartzman says. A RRIF is considered to be property in the marriage and could be considered an income stream and/or an asset.
Facing a lower standard of living
Pettica says a major challenge for his clients is the “huge sacrifice to their standard ofliving,” especially in expensive housing markets like Toronto. A couple accustomed to living in a home valued at $1 million has to nd an alternative for half that amount.
“With that $500,000, you’re not buying anything you’re used to living in. You’re probably downsizing,” he says. “The ability to maintain any semblance of what they’re used to is very challenging.’
Hartzman often has to help her clients understand they will be living on 50% of their assets after divorce. Her financial planning process includes budgeting what the client can or can’t afford based on their new reality.
She helps them understand their choices regarding living accommodations and lifestyle. “So [I] have them budget and understand where their money’s coming from and what they have coming for the rest of their life without running out of money.”
It’s a stressful life transition, Hartzman says, and the time it takes for a client to adjust to a new standard of living can last several years.
“It really depends on how willing the client is to embrace the fact that there’s a lot of change that has to happen and be willing to do the right things,” she says.
That means making lifestyle changes such as selling a home and downsizing or renting to free up equity, she says.
Calculating spousal support
Spousal support is calculated according to the federal government’s Spousal Support Advisory Guidelines. When there’s no child support, the amount of support is 1.5% to 2% of the difference between the spouses’ gross incomes times years of cohabiting, capped at the point of income equalization.
When it comes to duration, the guidelines call for between half a year and one year of support for each year of marriage. The duration is indefinite if the marriage lasted 20 years or longer. Support can also be indefinite when couples marry later in life: when the marriage lasted five years or longer, and the sum of the years of marriage and the age of the recipient at the date of separation totals 65 or more.
Division of property
Legislation for the division of property varies according to province. In Ontario, each spouse keeps their own property in a separation, but the couple shares any increase in the value of their property that occurred during the marriage. In that case one spouse pays the other an equalization payment.
In grey divorces, it’s common for the spouses not to have evidence for the value of the property they brought into the marriage, which often began decades earlier. In those cases, the property can’t be considered in the overall division of property, says lawyer Rick Peticca.
The rate of inflation is not a factor because the value of the property is considered at the date of separation, adds Peticca.