How Divorce Affects Retirement

While it’s never how we want our marriage to end, there’s no question that divorce can complicate retirement plans. In some cases, you could end up parting with a significant amount of assets or losing benefits you would have otherwise gotten. And unfortunately, divorce is becoming more and more common for people of all ages. While we often think of it as being more frequent among younger people, the divorce rate for older couples has been climbing since 2010, according to a 2022 study in the Journals of Gerontology.

In this article, we’ll explain how a divorce can impact your retirement, especially if it happens at an older age. This includes how the division of assets works, how retirement accounts get split up, and what happens to your estate plan. Finally, you’ll learn how a financial professional can help you navigate this tricky period of your life.

Division of Assets

You’ll likely face dividing your assets with your former spouse following a divorce. This can be a major disruption to your retirement, especially if it diminishes a large value of your assets. For instance, if you own a home, it might be sold off to make it easier to divide. It could, however, also go to your ex-spouse because of the court proceedings.

Below are some of the assets you could lose:

• Real estate
• Art and collectibles
• Vehicles
• Current nest egg or savings
• Stocks
• Bonds
• Retirement accounts (401(k)s, IRAs, and Roth IRAs)

Community Property States

Living in a community property state can have some critical implications on how you divide your assets following a divorce. In these states, the assets you and your spouse have purchased during your marriage must be split 50/50. There are nine states where this is the case:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

Keep in mind, however, that community property states often don’t require the division of the assets you own before your marriage. Even so, laws can vary by state. So, it’s best to consult with a professional if you have any questions on which of your assets are community property or not.

Equitable Distribution States

In other states, the goal is normally to divide assets “equitably” when divorcing. Amy Colton, a certified divorce financial analyst (CDFA) and founder of Your Divorce Made Simple, says “equitable distribution states divide assets in a manner deemed fair but not necessarily equal.” Since this isn’t a specific number, the courts have significant leeway when splitting earnings and property. When deciding a way to split property, they may look at factors such as:

• Length of marriage.
• Wealth accumulated while married.
• Needs of each party.

What Happens to Retirement Accounts?

When entering retirement, it’s a common strategy to lean on the savings you’ve accumulated throughout your career and placed in a tax-advantaged savings account, such as a 401(k) or IRA. However, a divorce can mean that these accounts may be split up or lose some of their value, potentially setting you back.

Here’s how it works to divide different types of retirement accounts:

401(k)s and Pensions

If you have a 401(k) or pension plan, the courts will use a qualified domestic relations order (QDRO) to disperse assets. According to Colton, this is “a legal document that outlines how retirement assets will be split between the divorcing parties.” She highlights that it’s only for accounts that fall under the Employee Retirement Income Security Act of 1974 (ERISA), and that “it is not needed for retirement accounts that are not ERISA such as an IRA.”

A spouse who receives funds from the account can elect to take a lump sum distribution or roll it over into their retirement account. This money is not subject to an early withdrawal penalty in this situation. It is, however, subject to state and federal taxes unless they’re rolling it into a tax-free or deferred account. During this process, Colton says “[it’s] crucial to work with an experienced attorney and financial advisor to ensure the division aligns with your long-term financial goals and tax considerations.”

IRAs and Roth IRAs

The process to divide or shift ownership of Individual Retirement Accounts (IRAs), both traditional and Roth, after you end your marriage is known as “transfer incident to divorce.” In this scenario, per the Internal Revenue Service (IRS), there will be two primary ways to transfer assets within the account to an ex-spouse. You can either put it in your ex’s name or you can directly transfer the funds. You would change the name if your former spouse was getting all the assets in the account, and you would transfer if they were only to get some of them.

What About Social Security?

Social Security is a big part of many people’s retirement plans. You’ll often try to maximize your payments as much as possible and give yourself the best chance to maintain your lifestyle into your golden years. But what happens to your benefit after you and your spouse split up?

According to the Social Security Administration (SSA) website, your ex can get up to half of your Social Security benefit in retirement. However, to begin collecting payments, they must:

• Be at least 62 or older.
• Have been married to you for ten years or more.
• Not have remarried.
• Have a 50% lower Social Security benefit than you.

It’s important to note that the amount your ex-spouse gets based on your Social Security record is separate from the payments you receive. That is, just because they’re receiving half or below of your benefit, it won’t cut into yours.

Estate Plans

Divorce can also throw a wrench in your estate plan. For example, what if you’ve named your ex in your will or made them a beneficiary of a trust? These will likely be subject to change. You’ll need to meet with an attorney or legal professional to iron out all the details and, if applicable, draft new documents.

Here are some estate components to consider changing and reviewing:

• Your will
• Living trusts
• Advance healthcare directives
• Power of attorney documents

It’s vital to do this as soon as you can. Colton emphasizes that this will help “reflect your current wishes and ensure your assets go to the intended recipients.” She also notes that “[failure] to update your estate plan can result in unintended consequences.”

How Can a Financial Advisor Help?

A financial advisor can be an immensely helpful resource if you’ve recently divorced and have questions about retirement. When you meet with one, they’ll be able to analyze your holistic situation and come up with ways to re-develop your plans in a way that makes sense. This is especially useful if your marriage ending has drastically changed the landscape of your portfolio and financial capabilities.

Advisory professionals can also be valuable in the middle of your divorce. They can, for instance, help you understand how it’s going to affect your finances and how to approach the division of your assets and retirement plans.

If you’re unsure which type of expert to work with, consider working with ones with titles such as Certified Divorce Financial Analyst (CDFA), Certified Financial Planner (CFP), and Chartered Financial Consultant (ChFC). These professionals uphold a fiduciary duty and are skilled in working with various pieces of your financial puzzle, including investments, benefits and accounts, and your estate.

CDFAs, particularly, are trained in divorce matters and, per Colton, “can provide valuable assistance by analyzing the financial implications of various divorce settlement options.” For instance, they may help with issues such as valuing property, splitting assets, and working around tax situations. Additionally, she continues, “They can help individuals understand the long-term consequences of asset division, including retirement accounts,” as well as “offer guidance on creating a post-divorce financial plan, which may include strategies for rebuilding retirement savings and optimizing financial outcomes.”

To find an advisor, we recommend using a matching tool, like this free one. After a quick set of questions about you and your goals, it’ll present you with up to three reputable professionals in your area.

Frequently Asked Questions

Are retirement accounts protected in a divorce?

Retirement accounts, such as 401(k)s, could be protected in a divorce in some situations, including:

• You live in a community property state and owned the account before you got married. In this case, it could count as separate property, thus safeguarding it from being divided. However, the account could still be split up if you contributed to it while you were married.
• You had a prenuptial agreement in place. If you have a valid agreement in place, your retirement accounts could be safe.
• You and your spouse had similar account values. Splitting up both your and your ex-spouse’s accounts could prove to be redundant. This is something your attorneys could work out while settling the divorce.

What is a qualified domestic relations order (QDRO)?

In the context of divorce, a qualified domestic relations order (QDRO) is a court decree specifying payments or dispersal of retirement assets or benefits to an ex-spouse. This includes the securities or cash within a 401(k) and pension plan.

How does a divorce affect a trust?

This ultimately depends on the type of trust you have. If you’ve just gotten a divorce and have named a former spouse as a beneficiary in a revocable (living) trust, then you’ll be able to work with an attorney to remove them and designate someone else. On the other hand, if you have an irrevocable trust, you likely won’t be able to make any changes.