Divorce on the Horizon – Protect Your Retirement

No matter your stage in life, divorce is disruptive and will likely wreak havoc on your finances. Learn how to protect yourself and your retirement if the Big “D” might be on the horizon

Introduction

When was the last time you read or heard something that really stopped you in your tracks? Not the typical stuff that is interesting, but quickly forgotten. Like the fast or fun facts you get so much of on social media. Nor rumors or gossip.

No, we’re talking about things that literally matter to our lives or those around us. Drop-out rates or drug usage among teenagers, the rising cost of groceries, the percentage of people living paycheck to paycheck or who don’t have enough savings to deal with a $500 emergency (example – set of tires), et cetera. These are real issues that might pertain to our kids, grandkids and others we care about.

Here’s another. If you’re nearing or in retirement you’ve no doubt had family members, friends or neighbors who have decided to make the big move to split with their significant other during their senior years.

In the past that seemed a rarity. But now it seems to happen with more frequency.

“Hey honey, did you hear that Bob and Carol next door are divorcing? They’ve been married like 30 years or so. Wow, I didn’t see that coming.”

Fact is that long marriages among older American’s always seemed the norm. Not surprisingly, according to the U.S. Census Bureau, approximately nine in 10 people over age 60 have been married. And in the past many older people remained married for a longer period of time. Till death do us part…

But starting in the 90s, the incidence of divorce among those 50 and older has risen significantly. The agency actually attributes at least part of this trend to the “Marital instability of the aging baby boomer generation.”

Ouch!!

More startling was information released by Bowling Green State University’s National Center for Family and Marriage Research. They reported that in data examined from 1990 to 2021, divorce for those aged 65 and up rose the most of any age groups, and that in fact the rate of divorce for them tripled during that period.

What used to seem rare has become a major issue for those entering retirement or already retired. Bowling Green’s research indicates that one in four divorces nowadays happens among the 65 and up group.

The reasons for divorce for seniors remains largely the same as ever: disagreements over money, infidelity, verbal abuse, pornography, substance addiction, mental illness, et cetera, according to Jocelyn Elise Crowley, a professor of public policy at Rutgers University and author of the book, “Gray Divorce: What We Lose and Gain from Mid-Life Splits.”

That can stop any senior in their tracks…yikes.

Beyond the emotional turmoil that divorce later in life can cause, it can really wreak havoc financially. There’s an old maxim that speaks to this reality, “Divorce can leave you with half your money and twice the expenses.” Take a moment to ponder that – it’s scary and sobering.

That’s generally the same for both parties and often the turmoil extends to family and friends you both share.

Obviously, none of that sounds very good. And hopefully it’s not something you will face, but the statistics don’t lie.

If you do find yourself in that category now, or might in the future, you have to be ready. Which translates to doing things that are necessary to protect yourself and your financial future.

Today we cover some of the key considerations to be aware of if divorce is on the horizon.

Forewarning

In a perfect world you and your soon-to-be ex could work things out amicably and get on to your own respective lives quickly and easily.

Were it so easy.

As a note of forewarning, the longer you’ve been married the more issues tend to come into play and the harder it becomes to find a path to equity, which is what a court will be seeking to ensure is present for both parties.

There’s a decent chance there will be tension and hard feelings for both sides (regardless of who initiates the divorce), exasperating the situation.

Whatever the scenario, to prepare yourself for what lies ahead you probably should seek legal advice from a trained third-party professional versus a family member or Bob the thrice-divorced neighbor who has plenty of unsolicited advice you’d be best to ignore..

A qualified divorce attorney can consult and at least tell you what to expect and provide guidance as to what you should be aware of and do in the case of a simple divorce where there are few shared assets or issues. Plan to pay a fee for the consult.

But with longer marriages and more entailed situations, you will probably need to engage your own lawyer – you can bet your spouse will. While tempted to save money, you don’t want to walk into court on your own while your spouse is represented by legal counsel who is armed and ready to take you to town, as it were.

One thing they will probably suggest at the very start is not to make rash or major decisions, especially if they are long-term in nature. Moving to some exotic locale, or even just out of state, might seem like a perfect idea at the time, but it might not “age well” twelve months down the line.

Especially when the reality of your financial situation starts to sink in and you realize you might need to work three jobs to maintain that household in the south of France.

If there are more significant marital assets and issues involved, you might find your lawyer wants you to bring in a Certified Divorce Financial Analyst (CDFA) to help facilitate the matter.

They help couples and their attorneys achieve equitable divorce settlements using knowledge of tax law, asset distribution, and short- and long-term financial planning. While not cheap, they can actually save you money and ensure you have peace of mind and are covered moving forward.

Oh, btw, while you have to consult, if not engage a lawyer, it’s not a bad idea to also look at the laws of your own state when it comes to divorce and assets.

You’re not looking to become an Internet expert, but each state is different when it comes to the various aspects of divorce, so arming yourself with some information will enable you to walk into a meeting with a lawyer with basic questions you need answered, which will hopefully facilitate the consultation.

Time to assess

In order to move forward with the process of disassociating from your spouse, you will need to take stock of what the two of you own. More specifically, what the two of you acquired that would be considered marital property.

Marital property is that which you saved for or purchased during the years of your marriage. If you were married for 25+ years, it’s a good bet most of what you own is in fact what is considered shared or marital property.

From the house to the cars, vacation club membership, artwork, jewelry, furniture, cash in the checking and savings accounts, real estate, investments and even the pets. Even custody of the kids if they haven’t reached legal age.

And most definitely the savings accumulated during the course of your marriage in your retirement accounts, including IRAs and qualified employer-sponsored accounts, such as 401(K), 403(B) and pension accounts, et cetera.

All of this must be divided in a manner that ensures equity for the parties involved in the  divorce proceeding. Without judgement as to who is at fault or who did what (in most states), the court always seeks to provide equity to the parties involved.

(Note – this encompasses assets and wealth accumulated during the marriage years – not wealth accumulated by either party prior to the marriage. Pre-nuptial agreements can supersede state laws if the governing court determines their validity, but they don’t govern marital asset ownership and division)

Identifying and determining the full extent of the marital assets shared among you and your spouse can get extremely entailed and complicated. You need to remember that while you drive the Red Audi and think of it as your own, it’s not really just yours. The same holds true for just about everything else.

That’s a feeling that doesn’t sit well with most people.

Hence, the need for an attorney.

Tricky financial stuff

When it comes to the aforementioned marital assets, your attorney will walk you through things, but it’s best to have an understanding of how retirement savings that have been accrued will likely be treated by the court. The IRS offers a good guide regarding taxes and separation or divorce.

First up, there’s two main legal provisions that pertain when it comes to divorce and qualified retirement assets that need to be split by a court.

• Transfer incident to divorce: When it comes to individual retirement arrangements (IRAs) that the two of you started during the course of the marriage, this is the order used within the legal separation or divorce agreement that addresses the assets that must be divided. This provision is not automatic – it must be requested by one party and both parties and the court must approve.
• Qualified Domestic Relations Order: When it comes to qualified employer-sponsored retirement account(s) funded during the marriage, such as a 401(k), this is the order used within the legal separation or divorce agreement that addresses the assets that must be divided. This provision is not automatic – it must be requested by one party and both parties and the court must approve.

IRA:

Although the IRS classifies IRAs as individual retirement savings accounts, when it comes to divorce courts they view them as shared marital assets, as both parties are recognized as having funded the account.

When it comes to separating IRAs in a divorce or legal separation, the court will look at value to dictate how this will occur. Normally this would be a considered a taxable event according to the IRS and taxes would be due. Even an added penalty of 10-perent would apply if done before age 59 1/2.

But in a divorce, such an event is considered a transfer incident to divorce that should be included in the separation or divorce settlement agreement approved by the parties and the court.

In such instance, you or your spouse could transfer part or all of the account into the other’s IRA account without incurring tax or penalty (considered a transfer or a rollover from the IRA account), as long as this action is part of the divorce agreement and is completed IRA to IRA.

The key issue is if done correctly, neither party is taxed or penalized.

If instead you receive a direct distribution from your spouse’s IRA, you will have 60 days to reinvest or “rollover” that distribution to your own IRA to remain qualified. Additionally, the distribution will likely have 20-percent withheld by the other entity (IRA custodian) to offset future income tax liability.

Lastly, remember that assets not held in a qualified account (cash, stocks, bonds, mutual fund shares, et cetera) would not be considered qualified, and as such would be ineligible to be placed into an IRA or other qualified account by the recipient, losing the benefit of tax-deferred growth going forward.

Employer-Sponsored ERISA Plans:

In the case of savings contributed to an employer-sponsored qualified ERISA Plan (Employer Retirement Income Security Act), a QDRO is used to divide qualified retirement plan assets between the owner and their spouse.

Unlike the transfer incident to divorce, a QDRO allows for the proceeds to be rolled over into the recipient’s own qualified employer-sponsored retirement plan, such as a 401(K) or an IRA. Normal distribution rules would apply thereafter. The receiving party can even do so into a Roth IRA, although they will have to pay taxes on the conversion, but with no penalties involved.

Just as with the aforementioned transfer incident, such a transaction would be tax-free as long as it was included in the separation or divorce agreement and properly reported to the IRS and the custodians involved for both parties.

Bottom line, your lawyer will likely have explained all of this, but it’s critical you understand these issues, as they are going to affect your life going forward, especially as you traverse retirement.

Social Security

Social Security is another major financial matter you may have to deal with in your divorce. Although SS benefits remains with the individual, according to the Social Security Administration, you are eligible for Divorced Spousal Benefits if you are:

• At least 62 years old
• Have been divorced for at least two years
• Remain unmarried now
• Were married to your ex-spouse for at least 10 years.

If such is the case you could be eligible for up to half of your ex’s Social Security benefits. But you can’t receive both your own Social Security as well as the spousal benefits. You’ll want to take the larger of the two.

The other stuff

Once you’ve covered the bases in terms of dealing with the retirement savings you and your spouse accumulated as part of your marital assets, along with your home (probably your other major asset), it’s time to think about practicalities – the other stuff.

It’s a fair guess you probably shared expenses and benefited from combined salaries and savings up to now. Now you’re probably the sole breadwinner of your household. As such, you are going to have to consider and address a plethora of issues.

Key issues will include:

• Getting used to making all you own decisions and going it alone, at least for some period. Starting to do so on your own after years of being part of a team and covering each other’s back can be a difficult transition in retirement
• Determining how you’ll pay for your expenses on your own when your assets have been reduced, probably by half
• You will likely have to belt-tighten and even reduce your standard of living for at least a period, if not the remainder of your lifetime
• Reassessing your plans for the present and future, which includes your goals and needs both now and in retirement
• Developing a new budget that is based on your new reality versus what you had in the past. It should be comprehensive and cover all of your sources of income, as well as all your expenses.

(For some perspective, it’s worth noting that many experts assert that you’ll need 70- to 80-percent of your pre-retirement income to maintain your current standard of living in retirement)

• Bolstering your income through other sources, including a second job, starting a business or a side-hustle
• You may even need to reconsider previous retirement plans, such as when you had planned to retire, or even going back to work if presently retired. Working longer might reduce your need to start taping into your retirement (extending your savings) and allow you to continue to save for a longer period. There’s the added potential benefit of receiving employer-paid health coverage versus paying for it yourself prior to turning 65 when you are eligible for Medicare
• Changing beneficiary information so your assets go where you want them to upon your passing
• And more

In addition to all of that, you will absolutely have to create a new plan for yourself in retirement that will act as a road map, guiding you through your golden years. Much of the information for your updated retirement plan will come from the examination of the aforementioned key issues.

Conclusion

Talk about an unpleasant read.

But the reality is that many gray divorces happen. And they are tough, so you have to prepare yourself just in case. When it comes later in life it can be become much more disruptive and costly.

Japanese philosopher and renowned violinist Shinichi Suzuki summed it up well in stating, “Love is grand; divorce is a hundred grand.” Often it can be many times that amount the longer you’ve been married and the more you and your spouse have accumulated.

In the scheme of things, a divorce or a legal separation are among the toughest challenges you might ever face. Surviving and protecting yourself, especially when it comes to finances, will be critical to your well-being moving forward.

Ultimately, you don’t want such an event to dictate and define the remainder of your life…period!

The good news is that just as with anything else, how you deal with a situation can make all the difference in the world, no matter how devastating it might have been in the moment. You can get past this and secure your financial security and future by taking informed steps.

There’s obviously a lot of issues that will need to be considered and addressed, so utilizing the service of a good lawyer is going to be critical. So too will be relying on a proven financial team who can help you navigate the financial issues that will come your way in a divorce and onward into your golden years.

One that can help ensure your plans and goals are fully considered and incorporated.

At Oak Harvest we can look at your current retirement plan to determine if it can really meet your goals. Or we can assist you with a retirement plan capable of helping you do so. We can build a holistic, comprehensive retirement plan addressing relevant issues, utilizing strategies that cover taxes, income, spending, healthcare, legacy, and more, customized to your specific needs.

A plan created with the goal of ensuring you can successfully live out the retirement you envision.

If you are ready to take the next step and talk to a team of retirement planners who can advise on all your retirement needs, and who will put your interests first, Schedule a call today!

 

Related Content

Preparing for Retirement When You’ve Gone Through a Divorce

Single Travel In Retirement – Consideration and tips

Retirement Planning From a CFP®: 6 Keys to a Happy and Successful Retirement

Remarried with Children – 4 Estate Planning Mistakes to Avoid

How Do You Avoid Losing Your Wealth After the Death of your Spouse?

Retirement Survivor Guide: 3 Retirement Action Steps to Take NOW To Protect Your Spouse Financially