When it comes to planning for retirement, divorce presents some unique challenges. Going through a divorce is emotionally challenging, but it doesn’t have to derail your financial future. By taking small steps today, you can secure your peace of mind for retirement.
With Divorce comes a number of special considerations, especially when you’re nearing retirement. In fact, divorce after 50—the rate of which has doubled since 1990—can have an outsize impact on your financial security. Splitting up a marriage can potentially halve your assets while doubling your expenses, which can be especially detrimental when you don’t have decades to regroup and rebuild. These considerations are in short, summed up as division of assets.
Topics that can get caught up when you’re dealing with a divorce include who gets the house, child support to payments, and lastly, what kind of value will your property hold during asset division?
To say the least, divorce will affect retirement and can sometimes complicate the retirement process. Here’s how you can protect your retirement after a divorce with the help of CKS Summit Group.
The first step in protecting your retirement assets is to know the rules that govern your retirement plans. Understanding the rules regarding the division of assets in your retirement plans is absolutely crucial. Various retirement plans and accounts have strict and specific procedures that need to be followed to divide retirement assets in a divorce. It’s important to stay on top of things, depending which state you currently reside in, you may have different rules to follow.
Everything has consequences. If you don’t follow the rules, it unfortunately may lead to giving up some or all of those assets—even if they were accorded to you in the divorce decree. Divorce decrees incorporate provision to spousal support and other parental responsibility. Once a divorce is finalized, they can make changes and provisions according to their circumstances.
A great example for you to be able to protect your retirement is the Thrift Savings Plan (TSP)—a defined-contribution plan. This plan is typically for federal employees and members of the uniformed services. It requires that the division of assets be clearly spelled out and referred to as the TSP balance directly in the divorce decree.
At the end of the day, it’s best to hire a professional, such as a family law attorney, to guide you through the divorce process. They can keep you in the loop of what laws are in place in your state and where you can best be protected.
When a couple divorces, individual retirement accounts (IRAs) can be divided by a regular court order or judgment, which is usually a straightforward process. Federal law allows tax-free transfers if both statements below are true:
- The IRA transfer is provided for in your divorce decree or property settlement agreement, AND
- The funds are transferred directly from one spouse’s IRA to the other spouse’s IRA.
However, dividing guaranteed pension payouts isn’t as simple as dividing IRAs. Any pension earned while the divorcing spouses were married is typically considered joint property in most states and is subject to some form of division in a divorce. That said, there are several ways that this current or future benefit can be divided.
Most pensions offer some form of survivor’s benefit and, in some cases, the ex-nonworking spouse may opt to retain this benefit. In other cases, the actual monthly benefit is divided between the spouses, and the survivor benefit may be waived, retained, or transferred depending upon the divorce decree.
Another scenario is that the nonworking spouse may come out ahead by waiving the survivor benefit and having the other spouse purchase a life insurance policy naming them as a beneficiary. This can be especially prudent if the survivor benefit will stop if the nonworking spouse remarries before a certain age.
If you’re in the process of getting a divorce or even considering it, it’s important to find out how your retirement assets will be divided. Here’s a couple steps you can take to ensure you get your fair share of retirement plan assets.
- Hire An Attorney
The best thing you can do for yourself is to hire a legal representative that specializes in family law and the divorce field. Seeking legal help and advice will benefit you in the long run. Even if dividing the rest of your marital assets seems relatively straightforward, it is wise to consult an attorney to review the division of retirement assets.
Divorcing spouses who are uneducated in this matter can both lose in some cases, due to simple ignorance of how pensions and other retirement assets work and which payout options may be the best for both parties even when they are divided.
- Review Social Security Benefits
If you were married to your ex for at least 10 years, then you might be eligible to get a portion of their Social Security benefits. You can visit the Social Security website to see what you will need to do in order to collect. If you are entitled to your own benefits as well, then you are usually allowed to receive the larger of either your benefit or your share of your ex-spouse’s payments.
Some couples close to the 10-year mark choose to have a legal separation first, so that they can stay married until they qualify for spousal Social Security benefits. A legal separation has many of the benefits of a divorce and can be a wise interim step that preserves important retirement benefits, especially if one spouse has earned significantly less than the other spouse.
- Stay on Top of Paperwork
Send all court orders and divorce agreement documents to plan and account custodians immediately. If you delay too long in doing this, then you may forfeit what is due to you because your paperwork is outdated and invalid.
Although private pension plans are required under the Pension Protection Act of 2006 to accept any court order regardless of when it was issued, it is still critical to submit this paperwork before any of the plan or pension assets are distributed. If you don’t, you may be faced with the prospect of trying to recover those assets yourself, which can incur further legal fees and bureaucratic wrangling.
After the divorce, when you’re single again, you need to make a new financial plan for retiring.
The first step in mapping out a post-divorce retirement plan is to determine how much money you actually need to retire. There are a few things to consider here, including:
- The value of the retirement assets you were left with after the divorce
- Your current income, expenses, and savings rate
- Your age
- The standard of living you expect to maintain in retirement
Once you’ve figured out how much you need to be saving, the next step is deciding where to put those funds. If you have access to a 401(k) or other retirement plan through your employer and you haven’t joined the program, it may be a logical choice, especially if your company offers a matching contribution.
Before defined contribution plans such as 401(k)s get split, the court must issue a qualified domestic relations order (QDRO). You can get a blank copy of this from your plan administrator. In most instances, your attorney drafts the QDRO before sending it to the divorce Court.
Once a judge signs it, the QDRO makes the asset split official, and it allows plan administrators to enforce it. However, these administrators must first accept the QDRO. This applies to all plans governed under the Employee Retirement Income Security Act (ERISA) of 1974. These include the following:
- 401(k) plans
- 403(b) plans
- Thrift Savings Plan (TSP)
Fortunately, however, the QDRO allows you to roll over your portion into your own qualified plan penalty and tax-free. You should continue contributing to this plan or roll it over to a Roth IRA via a trustee-to-trustee transfer.
Divorce doesn’t have to be the end of your retirement dreams. Understanding when you can take benefits, how your spousal benefits work, and when the timing makes the most sense can be helpful if you want to maximize this retirement income stream.
When you hire a financial advisor you can rest assured that your finances are in good hands. A financial advisor can help you create a retirement plan and help you manage both your plan and your overall finances. However, if you’re planning to seek help, keep in mind that not all advisors are created equal.
Are you facing divorce and unsure of how proceed with your retirement plans? At CKS Summit Group, we design, build, and manage custom retirement portfolios that are fully capable of simultaneously generating stable growth, increasing income, and preservation of principal throughout a client’s lifetime, with only limited downside market risk.
Whatever your marital status, let the retirement income experts at CKS assist you in creating a customized retirement portfolio – always designed with you in mind. Contact us here to set up your complimentary strategy session today.