Gray divorces, divorces in which couples over 50 splits, have been increasing recently. Divorce rates for people over 50 have doubled from 1990 to 2010. Regardless of the reason for divorce, from simple incompatibility to #MeToo style mistreatment, the rising trend of gray divorce leads to massive risks and challenges for retirement planning. These risks are because of the complex finances of older divorcees. Instead of one shared retirement, they now need to plan for separate retirements.
Of course, the impact of divorce on retirement is massive, which shows the need for strategy when mixing retirement planning and divorce. This article will talk about a few of the main points to think about when navigating retirement planning and divorce, including dividing retirement assets, things to think about legally, planning finances after the divorce, and adjustments to Social Security benefits.
Division of Retirement Assets
One thing to be aware of in terms of retirement planning and divorce is dividing the retirement assets. Dividing retirement assets in divorce has different requirements depending on the type of retirement assets.
401(k) Plans
Dividing a 401(k) plan during a divorce requires a Qualified Domestic Relations Order (QDRO). The receiving spouse can roll the resulting funds into their retirement account or take a distribution without any penalty.
IRAs
IRAs don’t require a QDRO to be divided in a divorce. The funds within can be transferred from one spouse’s IRA to the other’s as described in the divorce settlement agreement.
Pensions
In most divorce situations, pensions are seen as shared assets. This means dividing them requires careful inspection of the pension plan’s rules as well as state and federal laws.
Legal Framework
QDROs are important for dividing retirement assets in divorce the right way. The relationship between a QDRO and retirement accounts is unbreakable, unless dealing with an IRA. Mistakes in handling a QDRO could result in large tax penalties and/or the loss of retirement benefits.
Financial Implications of Gray Divorce
Income Adjustments
It’s also important to consider changes in gray divorce financial planning. Divorce can possibly result in halving retirement income. Of course, a large financial blow like this would cause a need for lifestyle changes such as moving to a smaller living space or changing spending habits. Gray divorce financial planning often requires both spouses to change their retirement plans, since they may need to work longer or change their career goals to maintain their finances.
Estate Planning
There are many extra things to think about when estate planning post-divorce. It will be necessary to update wills, beneficiaries, and other estate planning elements when the marital status changes. These updates make sure the ex-spouses are no longer each other’s beneficiaries, unless they are kept so for specific reasons on purpose. Changes to life insurance policies and survivor benefits must also be made when estate planning post-divorce, including potential waivers and alternatives like purchasing new policies.
Strategic Financial Planning Post Divorce
Reassessing Retirement Goals
Financial planning strategies are also important when figuring out retirement planning and divorce. As mentioned above, it’s possible for divorce to result in massive hits to retirement income. Therefore, it’s important to look at retirement goals and timelines again after the divorce. Several strategies can ensure financial freedom here, such as delaying retirement, seeking extra income sources, or investing differently. Regardless of the chosen strategy, gray divorce financial planning will require large changes to retirement goals, timelines, or lifestyle.
Professional Advice
Since the mixture of retirement planning and divorce is so complex, seeking professional advice can be a good idea. Financial advisors and legal professionals play a large role in navigating gray divorce financial planning. Working with a professional divorce lawyer, for example, can make sure all legal and financial documents are submitted and updated on time. This way, spouses can avoid more arguments and financial losses.
Social Security and Divorce
Eligibility for Benefits
Navigating Social Security rules and eligibility requirements is also important for retirement planning and divorce. There are many rules about Social Security’s eligibility for benefits, with criteria such as duration of the marriage and current marital status. For example, in some cases, ex-spouses can claim Social Security on the other’s work record. Divorced individuals can claim these Social Security benefits after divorce if they were married for at least ten years, are unmarried at the time of filing, and have been divorced for at least two years with their ex-spouse being 62 or older, or if the ex-spouse has already filed for Social Security.
Strategic Considerations
There are a few more strategies that can help when attempting to claim Social Security benefits after divorce. For instance, divorcees can time their divorce to capitalize on their Social Security benefits, especially if they have been married for almost ten years. If close to that ten-year mark, a couple nearing divorce can think about a legal separation. This way, they can qualify for the Social Security benefits outlined above before finalizing the divorce.
Additional Considerations
Post-Divorce Property Management
Managing real estate assets after a divorce can be quite difficult, even more so when both spouses own property. Good property management becomes important in making sure these properties are maintained and any income from them is managed in the right way. Whether deciding to sell the property, rent it out, or have one spouse keep ownership while paying the other, a professional property management company can handle the heavy work, including maintenance, dealing with tenants, and reporting the financials. This can reduce stress and keep the property an asset instead of a burden.
Navigating Retirement Planning and Divorce
Gray divorce financial planning is super complex and requires divorcees to think about several things. For instance, dividing the retirement assets, further strategies for financial planning, and claiming Social Security benefits must all be addressed. As a result, careful planning and professional guidance is important. Take some proactive steps to manage retirement planning post-divorce, such as seeking professional guidance, and updating all legal documents to reflect the impact of divorce on retirement.
