The Effects of Divorce on Retirement Planning

Divorce rates have ebbed and flowed from generation to generation, but for those over 50, the numbers have doubled since the 90s. 

For couples that are on the brink of retirement, there may be concerns and questions regarding how a divorce may affect their future. The financial components of a marriage can make divorce a complicated process. These hurdles become even steeper when retirement is involved, which means proper planning and education around the subject is especially important. 

New strategies  around divorce and retirement have emerged as a result of increased divorce rates. However, there are also some restricting aspects of divorce that may make retirement more challenging. 

A Late Retirement 

Unfortunately, a divorce could set retirement back longer than expected. A postnuptial or prenuptial agreement can help clarify spousal contributions  as separate property in the instance of a divorce. However, without an agreement, this property (a pension or retirement accounts) can be regarded as marital property – and thus  subject to division. The issue lies with improper planning or oversight, where a spouse doesn’t realize their savings could be split with another party, leaving their assets
significantly cut.

This can be a common occurrence, leaving some parties  believing that their retirement savings are entirely theirs. But, without an agreement to state the contrary, the financial situation becomes complicated, thus creating  a delayed retirement plan.

Social Security 

Social security can also be a serious issue during a divorce. One of the central components of social security is that an individual, age 62 or older, can claim benefits from their ex-spouse’s work history under certain circumstances. For example:

  • If they were married for ten years or longer 
  • If they are not currently married to another partner
  • If the ex-spouse is eligible for benefits

If these circumstances apply, a divorcee is entitled to half of their ex-spouse’s primary insurance amount at their full retirement age. However, there are some caveats to this.

For example, unless a spousal benefit is higher than their own worker benefit, it won’t make a significant difference — because worker’s benefits are typically paid first. Claiming benefits from an ex-spouse doesn’t impact their own benefits — but an individual will need to have the ex-spouse’s Social Security number.

401K & IRAs 

Retirement accounts can be a significant form of income and large assets that become a contentious repercussion of divorce. A 401K can be split-up through a qualified domestic relations order (QDRO). An individual can receive QDRO benefits from a retirement plan as if they were a plan participant. 

Pensions can be more difficult to split, but they are vulnerable to a division. These accounts may demand a great deal of paperwork and negotiation. Due to its sensitive and complicated nature, careful wording is essential. An experienced family law attorney can help with the process.

Home Equity 

Retiring couples rely on their housing as a financial asset. While it’s typically not thought of as a retirement plan by any means, it can play a significant role in retirees’ future.

Once couples pay down their mortgage, they store a lot of wealth into their home equity — which can play a big role during a divorce. There are a few common avenues many Americans take.

  1. One spouse may stay in the home and pay- out their ex-spouse’s stake in half of the home. When this happens, the spouse that remains in the home may need a new mortgage. During retirement, this can be a difficult situation to be in. 
  2. Selling the home and splitting the profits is another option. The shifting climates of real-estate can make this challenging, but it can mitigate  the more stressful roads people take. 
  3. Reverse mortgaging a home allows a spouse the ability to cash out on half of the home’s value to pay out the ex-spouse. This gives one spouse the opportunity to continue living in the house without a mortgage payment.

What’s a DRO?

A domestic relations order (DRO) helps divorcees navigate taxes that accompany access to retirement funds before it’s time to retire. An experienced divorce attorney can help introduce an individual to a DRO preparer that assists in the drafting, enforcement, and facilitation of a domestic relations order.

With this in place, extra charges can be avoided, and a retirement fund can be protected from draining costs. 

The Right Plan 

Divorce can be unavoidable, but it shouldn’t dismantle a retirement plan. While it can certainly make life more complicated, proper planning and the right legal assistance  can make an impactful  difference. 

A qualified attorney has all of the proper resources, tools, experience, and knowledge to make the process a less stressful one. While splitting up retirement accounts can become complex, it can be simplified  with the right help.