Is divorce in your retirement plan?

The retirement landscape that Boomers face is vastly different than that of their parents. Gone are the days of pensions, a career ending in one’s early sixties and growing old with one’s spouse. Now Boomers are faced with possible shortfalls in social security and 401(k)s, longer years in the workforce, and…divorce?

Legal experts refer to the first Monday of January as “Divorce Monday,” as it is the most popular day of the year to initiate divorce proceedings. A study from Ohio’s Bowling Green State University shows that one quarter of all American divorces now involve someone 50 or over—more than double that of just 20 years ago. While those seeking late-life or “grey” divorces, as they are sometimes called, tend to have a rosier outlook than their younger counterparts of life after the dissolution of a marriage,  older divorcés also face unique financial problems that others do not. Odds are accumulated assets, from real estate to retirement savings, are substantial and entwined, and impending retirement can make a favorable financial split particularly tricky.  According to a study from AARP, more than one in four of grey divorcés fear not having enough money in their post-split lives, a fear that comes second only to loneliness.  This is particularly true among women who were four times more likely than their male counterparts to be concerned with the negative effects of divorce on their finances.

Retirement accounts are treated as marital property, and divided among spouses, however, the process by which this occurs is not always cut and dry. When it comes to dividing assets such as 401(k)s and IRAs, there are federal and state laws that dictate how assets are split. However pension plan divisions are more complicated and require a separate order called a Qualified Domestic Relations Order or a QRDO to spell out who gets what and how much. There are a number of ways assets can be divided with a QRDO due to each couple’s unique situation. As a result, it is important that each partner ensure their rights to their portion of their spouse’s retirement account are protected, lest they risk a shortfall in their portion of the retirement nest egg.

Divisions of other elements in the retirement portfolio, such as investments, can often trip up older divorced couples as well, due to an uneven distribution of risk or asset diversity. Splitting real estate and investment assets is not always clear cut, and trading rights to stocks and bond notes for full access to a marital home can result in one spouse taking an unrecoverable loss in the case of a market downturn. It is important to make sure that when dividing assets, risk is as evenly split as possible, so one party isn’t left with huge downside potential with only a small window of time to recover financially.  Grey divorcés might consider placing a portion of their take from the marital estate into a conservative vehicle—like a fixed annuity—to buffer them from loss and offer guaranteed income in retirement regardless of how the market performs.

Divorce can be challenging, no matter your age, but a grey divorce can present some particularly difficult hurdles, especially in the context of retirement planning. It is important to take into consideration the unique financial issues associated with your situation while ensuring your financial stability for the long haul.

 

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