Divorce wrecks a lot of things, and your finances are often one of the biggest. Even worse, the financial impact of divorce isn’t limited to those first few years where you’re trying to live on an individual’s salary after years of sharing expenses.
Divorce can also seriously impact your retirement from a number of angles. Here’s a quick field guide to some of the most important to consider as you assemble your post-divorce financial plan.
First Things First: Run Your Numbers Again
Before we get to more divorce-specific considerations, you should run your calculations for some things that you might call “divorce-adjacent.” Each of these points might change the numbers that drive your retirement planning, so you will need to take a close look at them:
- Confirm your single-filing tax burden permits you to save as much as you had been saving
- Check how child custody will impact your taxes
- Consider how your health insurance will change, and how that will affect your expenses and cost-of-living
Divorce isn’t the only thing that might require you to look at these factors and similar considerations, but you definitely need to get these sorted before looking at the more complex ways divorce and retirement interact.
Some Ways Divorce Can Impact Your Retirement
- Splitting Your Retirement Plan
Your retirement savings will be one of the major assets you split with your ex-spouse when the divorce is complete. This might be a straight 50/50 split, or you might settle for less or more as part of an overall division of assets, or the split might be altered in lieu of alimony, or it might be divided according to any number of other possible strategies.
The exact split isn’t as important (from a-long term perspective—it will probably feel extremely important in the moment) as how you handle the split, and how you keep track of what’s still yours once it’s all done. For example:
- Plug your new total savings into your calculations for your retirement age, to see what the new total is.
- Make certain any retirement funds that change hands completely do so in ways that offer the same tax protection you enjoyed when you first saved the money.
- Confirm that the new, lower totals still qualify for the same interest and fee structures as the original accounts.
- Selling, Splitting and Buying Your Home
Assuming you were living together before the divorce, this point can be one of the most contentious concerns of dividing your assets. This typically happens in one of three ways:
- One spouse keeps the house, while the other gets larger shares of the other jointly-held assets to account for the equity.
- One spouse “buys out” the other spouse, paying an amount equal to his or her share of equity in the home.
- Neither spouse keeps the house. They sell it on the market, and split any equity between them.
Before you get into divorce negotiations, work out the math and determine both your preferred method and the most likely method for splitting the house. Then estimate the impact of those methods on your retirement savings and plan. Be sure to include details like realty fees, broker fees on a new mortgage, how the new mortgage payment will impact your ability to save, etc.
- Pensions and Social Security
Much like your retirement savings, these ongoing payments form the lion’s share of many retiree’s day-to-day income. What impacts them will have a major impact on how your retirement goes.
Who is entitled to what when it comes to pensions is a deeply complex point of financial planning and divorce law. The details are based on the assumption that all members of a family are largely responsible for all aspects of that family’s income. For example, a stay-at-home wife makes it possible for the husband to work, so she’s entitled to pensions earned while she was making that possible.
You will need to get a QDRO (Qualified Domestic Relations Order). This is an (unfortunately expensive) analysis of pension plans, 401(k)s, Keogh’s, and similar accounts to split them fairly according to a divorce agreement. Your divorce attorney will be able to, or they will know somebody able to, make and write this assessment.
Like your other retirement savings, it’s important to keep an eye on the tax implications of this division. Unless the QDRO is written correctly, it can expose you to taxation on those retirement accounts. In some cases, you might be on the hook for early withdrawal penalties. Mistakes are disappointingly common here.
- Reassessing Cost of Living
They say “two can live as cheaply as one,” but the truth is two live far more cheaply than one person living alone.
Your retirement savings strategy was based on your cost of living while living as a married couple: you had X amount of money left over at the end of the month, and you saved X-Y of it towards your retirement lifestyle.
Once you’re divorced, the value of X will drop significantly. You won’t be sharing mortgage payments, and your smaller home will cost more than half what your shared home did. The same goes for most upkeep expenses like food, utilities, insurance, and fuel.
There is almost no part of this consideration that isn’t ultimately bad news, and you might be amazed at how many people fail to take it into account. Keep this change to your lifestyle in mind, and change your retirement goals and expectations accordingly.
- Allocating Debt (and Protecting Credit)
Shared assets aren’t the only things that get split during a divorce. Your debts do as well. If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, you will be on the hook for half of your ex’s debt whether or not it’s in your name. In other states, you might negotiate taking responsibility for some of that debt as part of the larger division of finances. You will need to figure in all of these debts when you do your retirement planning, as the payments and interest will impact your rate of savings.
Further, your name will remain on some of the debts your ex is responsible for after the divorce is finalized. If your spouse becomes unable (or unwilling) to pay those debts, they can impact your credit score—and sometimes become your responsibility entirely.
Unless you are in a position to pay off all of your non-mortgage debts entirely, you will need to monitor this situation closely to keep your debt and credit where you need it to be.
Divorce is never fun. Even people who are glad to be divorced once it happens spend years in a marriage that wasn’t fulfilling. The news when it comes to divorce is almost always equally bad. Your retirement will either be delayed, or you will retire at a lower standard of living than you had hoped for.
But the best way to overcome that bad news it to get the facts as quickly as possible. Only then can you start making the changes necessary to get your retirement back on track.
Guest Post: Lexi Knowles is a twice-divorcée who’s had to deal with every single point of contention that comes with legal separation. After years spent dealing with both the legal and financial ramifications of divorce, she’s come to learn some valuable lessons she now tries to teach to as many soon-to-be divorced individuals. Learn from her mistakes, as she puts it.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.