Retirement Planning After a Divorce

Going through a divorce is one of the most significant events in a person’s life, affecting your family, your home, and your sense of past, present, and future — and the effects of divorce are perhaps most keenly felt when planning for retirement.

It can take time and careful planning to recover from the financial effects of a divorce — and while divorce is often considered to be a necessary and positive change for the people who go through it, your new financial reality may require you to make some short-term sacrifices and carry out some long-term strategic money moves.

Here are a few key insights and strategies to help you get through your divorce, while staying on track for a secure and comfortable retirement.

Understand how retirement assets get divided in divorce.

Divorce laws vary by state. Some states are “community property” states, where the state law requires all of the divorcing couple’s marital assets (the financial assets acquired by the couple during their marriage, such as homes, savings, retirement accounts, etc.) to be divided 50-50 between the divorcing spouses.¹

Other states follow a principle called “equitable distribution,” which requires more complex rules for distribution of the marital assets, based on each spouse’s earnings, the length of the marriage, and other factors.

Talk with your divorce lawyer and financial advisor(s) to make sure you understand the implications of how divorce will affect your share of the retirement savings that you and your spouse have accumulated together as a married couple. Don’t preemptively give up your rights — be ready to demand a fair share of the retirement savings, especially if your spouse earns significantly more money than you do.

Don’t overvalue your share of the family home.

Many divorcing spouses want to stay in the family home as a condition of the divorce; however, keeping the family home often may not be a smart financial move. If your soon-to-be ex-spouse offers to let you have the home in exchange for a larger share of your jointly owned 401(k), IRA, or other retirement savings, this could be a bad deal for your long-term financial future — that’s because houses tend to not appreciate in value as quickly as retirement savings could.

Also, houses incur maintenance costs and property taxes. If you can’t comfortably afford the mortgage on one income, this might cause you to save less money for retirement. Keeping the house — even if it feels like a “win” in the short run — could be a risky decision for your future retirement.

You’re often better off downsizing into a smaller, lower-cost home, in exchange for a larger retirement nest egg. It might feel difficult in the short term, but your future (retired) self will thank you!

Get your share of Social Security.

As a divorced spouse, if you were married for 10 years or more, you have the right to receive 50% of your ex-spouse’s Social Security retirement benefits, starting when you are age 62 — assuming that you are unmarried, have been divorced for at least two years, and the benefit you would have received based on your own work is less than what your spouse would receive. (Full details on eligibility are available from the Social Security Administration.²)

This Social Security benefit can be an added source of income for you in retirement, especially if you divorced later in your career or were a stay-at-home spouse for many years during your marriage. Another bonus: Your share of your ex-spouse’s Social Security benefit does not affect the amount of benefits your ex-spouse receives — this is not “costing” your spouse anything.

Pay attention to pensions.

If you and your spouse only have 401(k), 403(b), IRA, or other defined contribution retirement accounts, it is relatively easy to calculate the value of those assets and decide how to divide them evenly.

However, if your divorcing spouse has a defined benefit pension (these tend to be more common for public sector employees), this can be more complicated, because the full future value of the pension (often payable as monthly income for life after retirement) can be harder to calculate. Make sure you understand the fair market value of the defined benefit pension and include it in calculating your marital assets as part of the divorce settlement.

Each state has different rules for how divorced spouses qualify (or do not qualify) for a share of pension payments; you might find that your state does not have clear guidelines or any established process for how to pay a share of a monthly pension payment to a divorced spouse. As described by the Pension Rights Center, in some states, you can file a Qualified Domestic Relations Order (QDRO), which is a special court order to help ensure that each spouse gets a fair portion of the pension assets after a divorce.³

Put your retirement savings back on track.

A divorce is an opportunity to start a whole new financial life for yourself. Many divorced people find that they enjoy the chance to start saving money again for themselves, without having to pay for their ex-spouse’s living expenses. Sometimes ex-spouses can be a source of financial burden as well as a source of support — especially if your ex had expensive hobbies or poor savings habits, or used credit cards irresponsibly.

Use retirement planning tools to calculate how much money you will need in retirement. Take a big-picture look at your financial life and make a monthly budget that lets you maximize your retirement savings — as a general rule of thumb, you should try to save 15% of your pretax income for retirement (if you want to retire with retirement income that amounts to 70% of your working-age earnings), and, if you are age 50 or older, you can make extra “catch up” contributions to your 401(k), 403(b), or IRA savings plan — up to an extra $6,000 per year for the 401(k) or 403(b), and an extra $1,000 per year for an IRA. Consult your legal or tax advisor concerning your particular circumstances.

Reevaluate your life insurance situation.

After a divorce, your life insurance coverage — and needs — may change. Life insurance remains an important part of your financial planning throughout your life, whatever your marital status. To better understand your situation, answer a few simple questions to determine how much life insurance you need. Adjusting your life insurance can be an important part of finding new financial peace of mind after a divorce.

Sources:

1. https://www.investopedia.com/personal-finance/which-states-are-community-property-states/

2. https://www.ssa.gov/planners/retire/divspouse.html

3. http://www.pensionrights.org/publications/fact-sheet/state-retirement-plans-and-divorce

Ben Gran is a freelance writer based in Des Moines, Iowa, with more than seven years’ full-time experience. He writes about personal finance, financial services, technology, and business. Major clients include PNC Financial, Kabbage, and Quizzle.

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