Divorce is never simple. No matter the age, family make-up, location, or financial situation of a couple, the divorce process is inherently complicated. There are specific complications during a divorce if the couple involved is close to retirement.
This is not only a complex topic but a timely one. More men and women are choosing to divorce in older age than in the past. Some in the legal field and media have dubbed this phenomenon the “gray divorce” trend.
There are various theories about why the rate of divorce among those 50 and older has doubled in the past 30 years. But let’s not dwell on theories. Let’s get to the concrete details you should understand if you are currently facing divorce with retirement also on the horizon.
Given the drastic changes that come with divorce and retirement, keeping the family home might be appealing to you or your ex. Its familiar walls provide a sense of safety during a time of transition. Keeping the home, however, is more than an emotional choice. It is a crucial financial aspect of property division that greatly impacts both of you.
At this relatively later point in your life and marriage, you and ex might have paid off your home mortgage loan. Still, the home is of substantial financial value in terms of your total marital property. One person keeping the home would likely do so with the house’s value being considered as a portion of the total property division payout. You would have a home and no mortgage payment, but you might get less in other payments out of the asset division and alimony.
Also, you might be stuck with the costs of maintaining your home. If you sell the house after having been divorced, there are fees associated with that, such as realtor fees. You could be out that money if you alone own the house.
The Retirement Accounts
When you basically spend your whole working life with someone in a marriage, a retirement account is more than a so-called “future nest egg.” It is years and years of work, persistence, support, and discipline. Now, you are actually at the point when your future nest egg is the money for tomorrow’s bill payments. You might not have thought you’d be ending your marriage when reaping the benefits of your retirement accounts, but here you are.
First, don’t think that because you are divorcing you can’t get a share of the retirement money your ex has saved. When properly filed, a Qualified Domestic Relations Order (QDRO) allows the person who wasn’t paying into the plan to still get a portion of the retirement account upon divorce. Talk to your attorney about this step as soon as possible.
The QDRO form does not mean you will get money right away if your ex is yet to retire. A QDRO basically reserves a fair share of the investment portfolio in your name for when retirement commences. Taking money out of a retirement account before a certain age will result in tax penalties. So even if the volatility of the market scares you, you probably won’t want to cash out your investments early because you will lose more money due to tax penalties.
When agreeing to terms about splitting retirement accounts, know which kind of retirement accounts are on the line. The traditional 401(k) money you receive will be taxed as income. You will be out some of the total payout because of income tax rates. In the rarer circumstance you and your ex are splitting a Roth IRA, this money has already been taxed during the contribution phase and, therefore, won’t be taxed as income upon payout. Simply put, understand and consider tax laws connected to the specific kinds of retirement accounts that exist between you and your ex.
Don’t Get Overwhelmed. Get Help.
Family law alone can be confusing. Divorcing isn’t just saying “I’m done” to your spouse and walking away into a new, simpler life. Sure, life will hopefully become happier for all involved, but it takes mindful planning to pave the path toward that new chapter. It can be exhausting.
When the new chapter includes divorce and retirement, paving that path takes the most diligent of planning. Don’t try to get through the daunting and emotional process without proper, experienced help. Your trusted divorce lawyer will help guide you through the legal process and will have advice about where to find the financial planning expertise to best suit your unique needs.
An upcoming post will cover a few other important issues regarding divorce and retirement. Topics will include what happens with Social Security benefits, alimony, health insurance, and life insurance. These are all crucial components to discuss with your attorney in order to feel as secure as possible during and after the divorce process.