This article was co-authored by Paola Ramos, CFP®, a financial advisor based in the Bay Area.
The short answer to this question is “yes” — divorce usually has a substantial impact on most couples’ retirement plans. Additionally, the longer you’ve been married, and the closer you are to retiring, the more your plans could seriously veer off course.
Obviously, most couples don’t plan to get divorced, but the unfortunate reality is that many American marriages end that way — especially those between spouses who are approaching retirement age. In fact, the divorce rate for couples over age 50 has actually doubled since 1990.1 So while it’s an uncomfortable topic for many people to ponder, it’s important for you to be aware of how a divorce may impact you financially, and particularly as you plan for your retirement.
Whether you’re currently going through a divorce or seriously considering the option, make sure you have a complete understanding of how the transition could affect your retirement plans.
Navigating the Impact: What to Expect
A New Outlook
One of the most challenging first steps in navigating a divorce is shifting your financial mindset. When you were married, you likely planned for a retirement scenario that included sharing a home with your former spouse, as well as expenses, medical insurance coverage and long-term care. You had planned to age together and help each other along the journey into your golden years. Now that you are divorced, you have to think about your retirement plans in a different way, as you may be on your own — which can be more expensive.
Retirement assets are usually considered to be “community property,” equitably divided by divorcing spouses depending on the length of the marriage and other factors. It is important to note that the rules for the division of marital assets, including retirement accounts, will vary by state. Many states view retirement savings accrued during marriage as community property, even if the funds are held in an account under only one spouse’s name. Retirement assets accrued before marriage, however, remain separate property.
Balancing Your New Income and Expenses
Once your divorce is complete, you might find that your household income has significantly reduced, while your living expenses have not. Without your former spouse’s income, deferring a portion of your salary into your 401(k) plan or other employer-sponsored plan may no longer be possible, as you must prioritize your living expenses first.
If you are required to pay alimony to your ex-spouse, that expense can also have an impact on your ability to save as aggressively or as consistently as you did while you were married. And if you have small children, you may have added expenses associated with child care and/or child support that you didn’t have while you were married. You may even find yourself maintaining two homes — your home and your kids’ home — which will likely affect your ability to save for retirement.
In the short term, you may also be grappling with the emotional loss, stress and pain associated with your divorce, resulting in loss of focus or productivity at work. You may need to take time off from your job to manage these emotional and mental health matters (and perhaps the emotional impact of your divorce on your children) — which, of course, will impact your income and your ability to save for retirement.
Looking toward the future, you may have to work longer, because your divided retirement savings will no longer be sufficient for you to retire at the age you had anticipated initially. The older you are when you divorce, the less time you will have to replenish your retirement savings prior to your planned retirement time frame. As a result, you may have to reassess the type of lifestyle you will be able to afford in retirement. Moving forward, you will most likely be solely responsible for saving toward your retirement, and therefore will need to save more aggressively to make up for the retirement assets lost in the divorce.
Get Your (New) Retirement Plan on Track
It doesn’t all have to be doom and gloom! With careful planning and the guidance of trusted, professional advisors, you can successfully navigate one of the most difficult transitions of your life. Here are some tips that can help:
– Educate yourself on how retirement assets are divided between divorced couples in your state.
– Take the time to negotiate for your share of the marital retirement assets. Resist the urge to “just be done with it” and advocate for what is legally yours.
– Hire an expert (such as an actuary or attorney) to help value your marital retirement assets. Taking a lump-sum payout now may seem tempting; however, due to the time value of money, you may come out ahead by receiving an equitable share of the retirement assets instead.
– Assess whether keeping the house in lieu of retirement assets is truly a wise decision. Women, in particular, will often forgo their share of retirement assets in exchange for keeping the family home — but this may not always be the best financial choice. Your certified public accountant (CPA) or a Certified Financial Planner™ (CFP®) professional can help you evaluate your options.
– Always consider the tax implications of the various options for dividing marital retirement assets, both in the near term and the long term. Work with a qualified CPA to weigh each strategy and evaluate the potential tax consequences.
– Contact the Social Security Administration (SSA) to find out whether you can qualify for spousal benefits. If you were married for at least 10 years, you will likely be eligible for a Social Security spousal benefit, based on your ex-spouse’s earning record. The spousal benefit may or may not be larger than your own retirement benefit; you will receive whichever benefit is higher.2
– Make sure you obtain a qualified domestic relations order (QDRO) for any qualified retirement plans that will be divided between you and your ex-spouse, such as defined benefit or pension plans or a 401(k) plan. Talk to your attorney for more details about obtaining a QDRO.
Like most major life transitions, divorce will have a long-lasting impact on your finances, including your retirement. Therefore, it is crucial that you work with a qualified financial advisor to help ensure you’re making informed and unemotional financial decisions prior to finalizing your divorce. You may even seek the assistance of a Certified Divorce Financial Analyst (CDFA™), which is an advisor who specifically specializes in helping clients manage the financial complexities of a divorce. Securing your financial future will provide the peace of mind you need during an otherwise unsettling time in your life.