Some of the most dramatic shifts in family life are occurring among older Americans. Over the past two decades, divorces have doubled for baby boomers and the number of individuals aged 50 years and older who are cohabiting has surged 85%.
So, when a reader wrote with a problem, I knew it was shared by many. After a late-life divorce, the reader met his current girlfriend. They have been together for eight years. Right before the pandemic began, they bought their dream house for 1.5 million, together as equal owners. But it stretched their finances. They drained their bank accounts for it, stopped going out as they once would, and now spend more than half their total income on their new home’s mortgage payments.
He had sold both of his pre-relationship houses and she took some money from her individual retirement accounts (IRAs) for them to be able to afford the house. All told, she had contributed about one-third of the equity, he two-thirds.
What’s the problem? She has an adult child from a previous marriage living in a separate home she owns outright. I suspect she would tell me she is “saving” the property so that her child can inherit it. The reader is 72, and now that the worst of the pandemic seems to be over, he wants to travel more and work less, but feels constrained. They have the enviable problem of being house rich and cash poor.
I suspect an even bigger problem may be perceptions of unfairness. He may think he sacrificed more to buy their dream house and he wants her to extract more cash from her existing home. Only an explicit conversation about feelings and financial facts will solve their problem. Romance is similar to a business partnership as soon as you start living together.
The first step in managing finances is managing feelings. Partners have to ask themselves — and talk to each other — about what they want from the relationship and how their pre-relationship obligations will be handled.
Children from previous relationships often present the stickiest issues in such cases. In late-life cohabitation and marriage, duties of care should be clear. The main question to ask is whether the primary financial responsibility is to your partner or adult children.
Creating a will and a trust can work the same as a pre- or post-nuptial deed. Remember that relationships with stepchildren take time; issues associated with step-family formation are so formidable that it can take five to seven years for such families to reach an equilibrium. But the financial obligations and priorities should be made clear from the outset.
I am not a fan of inheritances and favor inter-vivo transfers instead: giving while you’re living. Incorporating kids into the monthly budget and savings decisions would make these obligations transparent for everyone.
Second, as your feelings are processed, construct a budget. Most of your cash flow will be in a joint account. And separate accounts can keep each partner’s assets and liabilities distinct.
Third, address long-term care risk. Less than 4% of people under the age of 80 need physical care for daily living and only 20% of those over age 85 need long-term care. Late-life romances present the tail risk of caring for a partner with an extended infirmity. Insurance is usually the answer for tail risk, but long-term care insurance in the US is private and too costly. So people have to self-insure. Being each other’s financial and health-care power of attorney helps protect both partners when one becomes incapacitated.
For the reader who emailed me, it makes sense to square up the ownership of their house. The house is now worth double what they paid for it. He put in $ 500,000 and she put in $ 250,000. She owes him $ 125,000. She could sell or borrow from her other property, which has also soared in value. Or they could simply change the ownership structure, so that he owns a larger proportionate share of the equity. Lawyers can sort this out.
At heart is that he wants to spend some of those millions in home equity before he dies. I wish reverse mortgages were decent; like long-term care insurance, associated costs are just too high. Governments should provide not-for-profit insurance for both risks.
In a dream world, each person in a partnership would have equal income and assets, and no pre-romance obligations. In the real world, an explicit system of contributions will bring forth feelings of care and fairness. While each partner may have legacy goals, a frank discussion on this topic establishes trust. Money conflicts are usually proxy wars for feelings about being cared for and loved.
Teresa Ghilarducci is the Schwartz professor of economics at the New School for Social Research and co-author of ‘Rescuing Retirement’.
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