Divorce can be messy. It can be dramatic. Untying the knot after years of commitment is emotionally taxing and stressful, and unfortunately, one in four of these divorces is happening to couples over 50 years in age.
Being over 50 and divorcing comes with a new set of problems. Retirement is approaching, and unlike younger counterparts who have to endure a divorce, they are not afforded a time horizon to correct for financial mistakes. A young couple who divorces may have years to recuperate and become prepared for a retirement on their own. Couples over 50 have to be increasingly financially savvy.
Divorce is more than an emotional separation. It is a financial separation as well. Losing a partner’s income can change your lifestyle. And it can change your retirement plans.
Dividing the Assets
Retirement plans are part of the assets to be divvied up. However, there are many regulations regarding their treatment. For one, in most cases only the contributions made during marriage can be considered marital property. This means only the assets contributed to a plan during marriage can be divided. To ensure this, all contributions you made on your own before marriage you should claim as separate property.
When dividing a 401(k) plan or other employee sponsored program (SEPs and IRAs have different rules) you will need a qualified domestic relations order, or QDRO. A QDRO cements the terms under which the retirement plan will be split and paid to the other partner. You cannot assume that retirement plans will be evenly divided, because without a QDRO they will not be.
A QDRO sets the value which will be paid to the ex-spouse. So if the value of the account goes up, this does not mean the ex-spouse gets a greater portion of the account, but rather the amount locked in by the QDRO. Furthermore, the QDRO can come with some tax advantages. It will allow for a one time tax free early withdrawal from the amount paid from the 401(k) for those under age 59 ½.
A QDRO can be very complicated, and you may want to consult a QDRO specialist to make sure to avoid any costly mistakes.
Couples should also consider the tax advantages of the accounts they get. For example, a Roth IRA has tax free distributions after retirement age, where as a 401(K) does not.
Do you know your long term plan?
After the division of assets is complete, you have to look forward. Are you prepared for retirement?
New divorcees often over withdraw from their newly awarded 401(k) or other retirement plans to take advantage of the tax break and pay off divorce fees. But over withdrawing can be costly, shrinking your nest egg and causing you to lose out on interest and growth in the account.
You also need to consider how the terms of your divorce will affect your income. Will you have alimony payments? Child support? A settlement? All of these can shrink your egg and add to your expenses. You may have to consider a different allocation strategy to make sure you generate enough income to pay these expenses and keep yourself at the standard of living you want to have in retirement.
You also need to be financially educated. Do you know your partner’s investment strategy? Enough about investment vehicles? Your budget? Even though some couples keep separate finances, both partners should be knowledgeable. You do not want to be in the dark so much so that you cannot handle your own finances if ever necessary. Both of you need to know what your financial options are, where your money can generate a good return, and how to execute a good plan. Retirement is still a 20-30 year proposition, with or without your spouse, and both of you need your money needs to last all of that.