How to Stop Divorce from Ruining Your Retirement

“Gray divorce,” a term used to describe divorce in long-term marriages in couples over the age of 50, may cause a significant, negative impact on the former couple’s retirement plans. However, with a bit of careful planning and the guidance of an experienced divorce lawyer, the financial effects can be made much less painful.

Researchers Observe Rise in “Gray” Divorce Rates

Pew Research Center is a nonpartisan fact tank that informs the public about the issues, attitudes and trends that shape the world around us. Their research is based upon public opinion polling, demographic research, media content analysis and other empirical social science research. According to PRC, the rate of divorce in couples over the age of 50 has doubled since the 1990s.

The financial risk of such divorces disfavors the spouse who may have stayed at home to take care of a family. These caregivers, the highest percentage of which is women, find it particularly difficult in that they have little or no retirement savings of their own, nor do they have a foundation upon which they can build a new financial plan.

Here are five steps divorce lawyers recommend you take before your divorce is finalized to protect your retirement:

#1. Recalculate your Budget Before Your Divorce is Final

In 2018, the Center for Retirement Research at Boston College published a paper finding that divorce is a significant factor leading to financial risk upon retirement. According to the Center for Retirement Research, divorce can eat away a couple’s financial assets at a time when replenishment of those assets is unlikely.

Fidelity Investments conducted a similar survey that showed more than a third of their sampling who went through a divorce reported that they were still struggling financially five years after the divorce was final. Fidelity’s study also showed that more than a quarter of the respondents were taken aback by how much it cost to live on their own.

In order to prepare for your divorce, you should do these things as soon as possible:

• Create a realistic budget based on real numbers
• Include some savings in your plan
• Build an emergency fund, even if you can only contribute a small amount per month
• Be sure you have a retirement account in your own name
• Avoid risky investments in an attempt to catch up

#2. Stay In (or Return to) the Workforce after Divorce

It is a good idea to rejoin the workforce upon getting a divorce. The mere fact of getting a job and establishing a routine will do wonders for your confidence. Even if you haven’t worked outside the home in a while, there are likely many jobs for which you are qualified. Realistically, the pay may not be what you would hope for. But there are more reasons than just a paycheck that make being employed a good idea. Health insurance, for instance, can be motivation alone to reenter the workplace, especially if you have not yet reached Medicare eligibility.

#3. Maximize Social Security Benefits after Divorce

You may not realize that if you have been married at least 10 years, you will be eligible to receive Social Security benefits based upon your spouse’s work history. Because of this, divorce attorneys recommend that you delay drawing Social Security as long as possible to maximize the amount of spousal benefits due to you.

To illustrate the point, if you were to claim Social Security benefits at age 62, you would receive about 75% of what you would have gotten if you had waited until your “full retirement age.” Waiting just a few more years until you reach full retirement age allows you to collect 100% of the benefit for which you are eligible. On top of that, if you postpone filing until age 70, you can receive what is called “delayed retirement credits.” The difference can add up a significant number of dollars over the course of a long lifetime.

#4. Establish Your Own Retirement Account Before Your Divorce is Final

As part of your divorce, your attorney will talk to you about a qualified domestic relations order (a QDRO), which places a claim upon your portion of your spouse’s retirement benefits. QDROs are separate from the divorce order. Under a QDRO, money is transferred directly from your spouse’s retirement account to a qualified retirement account in your name. The transfer into a QDRO avoids the tax liability that would be incurred if the money went into a normal savings account.

If you don’t have a retirement account in your own name, be sure to open one before the divorce is finalized. A tax-deferred retirement account is necessary to deposit any retirement assets you receive from your spouse without incurring a penalty.

If at all possible, avoid cashing out your portion of the retirement funds. While you may think this is a good way to cover immediate costs, remember that you have your long term financial security to consider.

#5. Strategically Use Real Estate after a Divorce

If you and your spouse owned a home together, selling it may seem overwhelming. While the divorce is painful, no doubt you have happier memories tied up in the family home that you may have lived in for decades. However, most financial experts and attorneys agree that selling it may be your best move. The equity in the house can be a significant financial resource for your retirement.

Consider downsizing to a home that you can grow old in. While you may be emotionally attached to your home, remember that the expense of maintenance and repairs could be a significant financial burden. Downsizing is generally inevitable as one grows older, and this may be the perfect time to start afresh in a new place.

Divorce & Retirement Consultation

Starla Zehr is a divorce lawyer with extensive experience helping people facing the dissolution of their marriage, including displaced homemakers. She guides her clients through the process of divorce with a goal of preserving as much financial security for the future as possible. She understands the intricacies of family law, and knows what things need to be considered in order to set her clients in the right direction. If you are over 50 and are considering a divorce, give Oakland County divorce lawyer Starla Zehr a call today, for a free consultation to understand how a divorce may affect your finances and your retirement.