Divorce can be devastating not only emotionally, but financially as well. And, if financial experts are to be believed, then the biggest impact of divorce is felt years later, and thus, could ruin your retirement. A simple reason for this is, prior to divorce, two incomes supported one family and retirement goals, but after divorce, the two incomes support two households and two retirements. Detailed below is everything you need to know about how divorce impacts retirement and how to protect your retirement after divorce.
How does divorce impact retirement?
If younger couples choose to divorce, there may not be much impact on their retirement plans. The only effect will be on the funds that they would have collected in their pensions or other retirement accounts. Such funds will likely be split into half, and the couples will have time to earn and save.
However, if couples get a divorce some years later, like mid- to late career, then they will likely feel a bigger impact on their retirement plans. If you have no specific agreement pre or post marriage, then sharing funds after divorce could take a toll on your retirement savings. This means you will have to keep earning to build your savings back up.
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Moreover, your living expenses in retirement would be higher as you may have to support your spouse living in separate households. There could be several additional expenses that you may have to pay, such as your spouse’s health premium, long-term care or disability insurance and more.
Other expenses that you need to factor in are attorney fees and the divorce expenses. Both these expenses can affect new couples and also those who are near their retirement date. A point to note is that even an amicable divorce could set you back thousands of dollars. Such expenses could be another reason why you may need to work for more years to ensure that you have enough funds for your retirement.
Another way divorce impacts retirement is by meddling with your plans of where you want to retire. If you have minor children, then custody issues could limit where you can retire.
Now that you know a little of how divorce impacts retirement, let’s see how to protect retirement after divorce.
How can you to protect retirement after divorce?
The first and foremost thing is to plan ahead of time. Though no one wants a divorce, in some situations, it could be the best possible solution. Thus, you and your spouse must be open on how you plan to split the assets, in case you both decide to end the relationship and file for divorce. You may also go for professional or legal help, or even get an agreement or a decree to prepare for the worst.
Another thing to protect retirement after divorce is to know the rules for each of your accounts, plans and pension payments. There are specific rules and procedures for various accounts that must be followed when splitting retirement assets. Failure to do so, may forfeit some or all those assets. For instance, the Thrift Savings Plan requires the division of the plan’s assets to be clearly laid out and is referred to as the TSP balance in the divorce decree.
Also, you must know that if you had any debt inside a retirement plan, then that is also a joint obligation unless the divorce decree says otherwise. For instance, if you have any loan from your 401(k) plan, then a 50-50 split would need to be calculated on the balance in the plan.
Coming to retirement funds, though they are usually divided at the time of divorce, there are a few factors that may affect the allocation of retirement funds. For instance, any pension earned during the marriage time is usually joint property and needs to be divided. However, there are different ways in which these funds, both current and future, can be divided.
Apart from the above things, there are a few more tips that could help protect retirement after divorce.
- Make sure that you send all court orders and divorce-related documents to the custodians. Any delay in submitting the documents could work against you, making your paperwork outdated and invalid.
- If your marriage has been for at least ten years, then you may be eligible for some part of your spouse’s Social Security benefits. To know more about that, you can visit the Social Security website.
- Make sure that you are registered as the survivor to continue getting any benefits, such as a pension, after your partner is gone.
It is recommended that you take the help of a financial planner to ensure that your retirement plans stay on track. A financial planner would consider all scenarios and suggest the best possible route to ensure that your retirement goes as per your expectations.