Allworth Co-CEO Scott Hanson outlines some key financial planning considerations for anyone going through a divorce.
With an undeniable impact on children, your friends, even where you’ll live, divorce is one of the most difficult experiences a person can endure.
Add to those challenges the division of assets, and the conflicts inherent in the negotiation process, and the emotional and financial scars of divorce invariably linger long after the proceedings end.
About half of all marriages end in divorce, but, the good news is, that after decades of increases, divorce rates for most demographics have stabilized (or even slightly fallen).1
The bad news is, unfortunately, that while rates for the younger set have plateaued, divorce for people over 50 has seen a 100 percent increase in the last 25 years. 2 (Though those rates are still substantially below the numbers for folks under 50.)
I’ve advised a lot of people (and couples) who are going through a divorce, and one of the things that has stayed with me is the imperative that people facing this challenge need to remember: whether you are divorced and retired, or divorced and still a few years before retirement, while working to keep the lines of communication open, you’ve still got to doggedly protect what is rightfully yours.
Following 5 Retirement Planning Must-Dos for Single People, and 4 Common Planning Mistakes Couples Make, as the third segment in our series on retirement preparation and marital status, here are 5 financial considerations for people facing divorce.
1. Know how retirement plans work in a divorce
I’m not an attorney, so this is not intended as legal advice, but it's instead to alert you to the complexities of just one of the major challenges of dividing a common asset: there are some esoteric rules that pertain to divorce and retirement plans.
For instance, the laws related to defined contribution plans for federal employees (Thrift Savings Plans) require the spouse to refer to that account in the divorce decree specifically as the “TSP balance” or you risk forfeiting some (or all) of those funds. The decree needs to state that you (or your spouse) are going to receive 50 percent (or whatever number is agreed upon) of the “TSP balance” somewhere in the document.
A verbal agreement, or an incorrect reference in writing, if challenged, could easily result in the non-account-holding-spouse being denied their otherwise rightful percentage of the assets in a Thrift Savings Plan.
2. Retirement plan debts are a shared obligation
About 35 percent of defined contribution plan (401(k)s, 403(b)s, or 457s) participants have taken a loan out against their account balance. Called a “joint obligation,” upon divorce, if the loan has not been repaid, then repayment is typically considered the responsibility of both partners and not just the account holder.
3. The division of pensions is complicated
While the division of assets such as IRAs are comparatively straightforward, that is not necessarily the case when it comes to pensions.
If you (or your spouse) earned a pension, in most states that asset is considered shared, but its division is a road with numerous twists and turns and an almost incalculable number of decisions. For instance, pensions typically offer what is known as a survivor’s benefit for the spouse (which continues payments in the event of the death of the pension holder), and in some circumstances that benefit can be carried over after divorce.
4. Know your Social Security rights
With dozens of filing options that can substantially raise (or lower) your total lifetime benefit amount by tens of thousands of dollars, there’s a reason that our Social Security workshops are among our most well-attended.
It’s confusing!
When it comes to divorce, if you were married to someone for over a decade, whether you worked, or not, you could elect to collect Social Security on your spouse’s work history.
And don’t worry about hurting your exe’s income (or feelings), because not only does it not impact their Social Security benefit amount, they also won’t know that you’re receiving a benefit based on their work history.
5. If you’ve yet to marry, consider creating a prenuptial agreement
No longer just for the uber-wealthy, if the marriage ends, a prenuptial agreement can drastically reduce heartache, expense, and stress.
Remember, if things go south in a marriage, the “this is mine” survival mechanism kicks in.
Simply, every asset not gained can feel like a devastating loss.
One way to shorten the process (and conflicts) of divorce is to have a well-conceived prenuptial agreement put in place before the ceremony takes place. While I hope you never need it, a prenup will likely save you legal fees and speed up the proceedings, and a faster process with fewer decisions (and battles) should expedite the healing and allow you both to get on with your lives that much faster.
If you’re facing divorce, it’s likely that communication between you and your spouse has almost entirely broken down.
And yet for the folks I’ve worked with who, however painfully, find a way (at least financially) to keep the lines of communication open, both parties typically come out ahead in the end.
Remember, half of marriages end in divorce (and it’s certainly not always because people fall out of love). So, the best (and likely the least expensive) approach is for both parties to work together to protect themselves before, during, and, if it comes to it, after the marriage.
If you are planning to get married, or if you’re married and divorce is unavoidable, speak with your advisor (ideally with your partner) about your options for protecting you both and dividing your assets amiably.
1 https://www.citizensbank.com/learning/retirement-savings-after-divorce.aspx
2 https://www.kiplinger.com/personal-finance/602589/gray-divorce-rates-are-exploding-due-to-this-perfect-storm
