Divorce and Retirement: What You Need to Know
Divorce is never an easy experience, whether you’ve been married for decades or just a few years. Negotiating a divorce settlement can be complicated by lingering emotions, custody battles, and difficult division of assets. But while divorce may be hard on your emotional wellbeing and your wallet, there are steps you can take to minimize the impact on your retirement plans.
Here’s what you need to know about how divorce can affect retirement security.
Retirement Savings Plans
First, consider the impact that divorce could have on your retirement savings plans. Unless you signed a prenuptial agreement stating that retirement savings will remain separate assets instead of marital property, you will likely need to split any retirement savings that you accrued while married. Depending on how much you have saved, this could set you back in terms of savings goals, especially if you earn less income than your spouse.
It’s important to note that any debts owed on retirement plans—like a loan taken out against a 401(k)—will remain a joint obligation, unless the proactive steps that the settlement includes an agreement that debts will be paid before a division.
For employer-sponsored retirement savings and pension plans, you will need a qualified domestic relations order (QDRO) to avoid taxes or penalties normally associated with accessing funds before retirement age. Your attorney or a financial professional can help ensure that you have this and all other documents necessary to mitigate unnecessary costs.
Changes in Expenses
In addition to impacting your savings, divorce can also make a big difference in your living expenses. Thus, it is essential to understand them both before and after retirement. If you plan to live alone, your budget may be tighter than when you were splitting expenses with your spouse, especially if their income is higher than yours.
You should also consider expenses like child support if you have children together or health insurance if you were included on your spouse’s employer-sponsored plan. Being realistic about how much you may spend on legal fees combined with ongoing expenses will help you better plan for your future retirement.
Social Security Benefits
If you’re close to retirement age when you get divorced, consider how it might affect your Social Security benefits. You can still collect benefits from your ex-spouse’s Social Security earnings, even if you’re divorced, as long as your marriage lasted at least 10 years, both you and your spouse are eligible to receive Social Security benefits and your benefit amount is less than that of your ex-spouse’s.
In an often overlooked consideration, some couples who are close to the 10-year mark may choose to go through a legal separation first, and get divorced after they have been married for 10 years, in order to take advantage of spousal Social Security benefits.
When it comes to divorce and retirement, every person’s circumstances are different. I can help you through your specific needs and give advice on the best way to protect your retirement security through a divorce.
To explore options and strategies for your situation, reach out using the “Click for a Free Consultation” button.
Edward C. Goldstein, CFP®, MBA, President
CERTIFIED FINANCIAL PLANNER ™ Practitioner
Financial Life Planning, LLC
10,000 Lincoln Dr. East, Suite 201
Marlton, NJ 08053
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.