The dream for marrying couples is that they will have a long and happy relationship, work together to save for a wonderful future and comfortable retirement, and live happily ever after. But given the high rate of divorce, that dream often takes a detour. Suddenly, each spouse has to think about their own future and how dividing their retirement savings and other assets will affect their plans.
For younger couples who choose to divorce, retirement plans may not be dramatically altered. Whatever funds they’ve accrued in their pensions or other retirement accounts during the marriage are likely to be split (unless they’ve signed a prenuptial agreement indicating that their retirement savings are separate, rather than marital property), and they still have plenty of years to earn and save. But couples who divorce farther down the road—mid- to late career—have more to think about when it comes to how their retirement plans will be affected.
Retired Couple
Following are some retirement-related issues to consider when you divorce.
You may need to retire later than you had planned. Unless you have a prenuptial or postnuptial agreement specifying that the contributions you’ve made during your marriage (and those that have been made on your behalf) are your separate property, your pension/retirement accounts will be considered marital property, subject to division with your spouse at the time of divorce. Sharing those funds could set you back in terms of your retirement savings goals and necessitate that you continue to keep earning until you build your savings back up.
Consider, too, that your living expenses in retirement may be higher than you had planned now that you and your spouse will be living in separate households. You may need to raise your retirement savings goal to accommodate these financial responsibilities. Assess your new circumstances: Will you be ordered to pay child or spousal support? Will you be expected to pay the premiums on your spouse’s health, long-term care or disability insurance? (Sadly, some couples actually stay in their unhappy marriages longer simply to maintain their health insurance benefits.) What other expenses might you incur as a result of your divorce?
Don’t forget to figure in the costs of the attorney fees and expenses of your divorce. Whether you divorce near your retirement date or long before, this expenditure can have a significant impact on your finances, as even an amicable divorce can cost tens of thousands of dollars. If you’re close to retirement age, this might be another factor that pushes you toward working longer to ensure you’re on solid financial footing.
If you have minor children, custody issues may limit where you can retire. For example, if your plan was to leave your home in New York to retire in Florida, but your ex-spouse plans to stay in New York, you may be pressured to stay as well. If you’re not about to forego spending regular time with your children—, then the plans you had for buying a home in that new location may have to wait.
In fact, your more immediate living arrangements may be affected by your divorce as well—whether you have children or not. If you and your spouse have traditionally been snowbirds, having to compile financial records and other materials for the divorce, attending court appearances or meeting face-to-face with your lawyer might limit your ability to fly south as your divorce moves forward.
Your minor children are entitled to your Social Security. Most people know that, depending on the length of the marriage and other criteria, an individual can receive social security benefits based on their former spouse’s earnings record, but many are unaware that if you have minor children at the time you become eligible to start collecting Social Security payments, your child also will receive payments until they reach the age of majority. Understanding who is entitled to payments in connection with your earnings record, in what amounts, and for how long can be helpful in determining the appropriate support structure as you work out the terms of your divorce agreement.
Your lawyer should recommend a DRO. As you look to divide the assets of your retirement accounts, a domestic relations order (DRO) may be necessary to avoid the taxes or penalties that would normally be associated with accessing your retirement funds before retirement age. Your attorney should help you engage a qualified DRO preparer to facilitate the drafting and enforcement of the DRO so that you don’t incur those additional charges, which would take a bite out of your retirement savings.
While it’s true that divorce can cause you to make adjustments to your retirement plans, it doesn’t have to ruin them. When you approach the situation pragmatically and with an attitude open to compromise, you can look to your future with enthusiasm and peace of mind.
