The Importance of Professional Financial Advice in Divorce
Pensions and 401(k)s can be tricky to divide during divorce proceedings. Seek expert help.
Jenni (names have been changed) came to our office for post-divorce financial planning. Jenni is 60, a former stay-at-home Mom and current yoga instructor with two grown children. She never had a professional career and spent much of her adult life with a series of low-paying part-time jobs. She is thinking about retiring now and wanted to know whether she would be able to make it through retirement without running out of assets.
Jenni traded her interests in her husband's 401(k) and kept the marital home, an IRA and half of a brokerage account. The lawyers agreed that the 401(k) should be discounted by 25% to take into account the fact that a 401(k) holds pretax assets.
That sounds entirely reasonable on the surface. But as a professional financial planner, I believe that it was a mistake for Jenni to agree to a 25% discount adjustment to the 401(k). After analyzing her finances, it became clear that Jenni would likely always be in a lower-than-25% federal tax bracket after retirement. Had she met a Divorce Financial Planner sooner, he or she would have likely advised against agreeing to a 25% discount to the value of the 401(k).
Subscribe to Kiplinger’s Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Jenni and Ron, her ex-husband, also agreed that she would get half of her marital interest in a defined-benefit pension from his job as a pediatrician with a large hospital. According to Ron, there was no value to the pension, and it was probably “not worth much anyway.” Neither lawyer disagreed.
Ah, but this underscores the importance of seeking the advice of the right professional to analyze financial issues!
After a little research I found that Jenni would end up receiving a little over $37,000 a year from Ron’s pension at his retirement, assuming he is still alive then. This is far from an insignificant sum for a retiree with a projected lifestyle requirement of less than $5,000 a month!
There are also restrictions with dividing Ron’s defined-benefit pension: the ex-spouse or alternate payee can get his or her share only when the employee takes retirement. Furthermore, the payments stop when the employee passes away. (Each defined-benefit pension has its own rules. Each pension should be evaluated individually).
A defined-benefit pension such as this one does not have a straightforward value in the same way as an IRA. It does not come with a dollar balance on a statement. The pension is a promise by the employer to pay the employee a certain amount of money in retirement based on a specific formula. In order to get a value and for it to be fairly considered in the overall asset division, it needs to be valued by a professional.
In her case, Jenni was awarded 50% of the marital portion of the defined-benefit pension. Was it the best outcome for Jenni? It is hard to re-evaluate a case after the fact. However, had she and Ron known the value of the pension, they might have decided that a different division may have better served their respective interests. Jenni may have decided that she wanted more of the 401(k), and Ron may have decided that he wanted more of the pension. Or possibly Jenni may have considered taking a lump-sum buyout of her claim to Ron’s pension. In any case, they would have been able to make decisions with their eyes open, instead of taking the path of least resistance.
The news that her share in Ron's defined benefit pension had value was serendipity for Jenni. It turned out that the addition of the pension payments in her retirement profile substantially increased her chances to make it through retirement without running out of assets. But it is possible that an earlier understanding of the pension and other financial issues could have resulted in an even more favorable outcome for Jenni.
Chris Chen CFP® CDFA is the founder of Insight Financial Strategists LLC, a fee-only investment advisory firm in Waltham, MA. He specializes in retirement planning and divorce financial planning for professionals and business owners.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Chris Chen CFP® CDFA is the founder of Insight Financial Strategists LLC, a fee-only investment advisory firm in Newton, Mass. He specializes in retirement planning and divorce financial planning for professionals and business owners. Chris is a member of the National Association of Personal Financial Advisors (NAPFA). He is on the Board of Directors of the Massachusetts Council on Family Mediation.
Kiplinger Readers' Choice Awards 2023 Results
The results are in for the Kiplinger Readers’ Choice Awards — celebrating the best products and services in personal finance.
By the editors of Kiplinger's Personal Finance • Published
Is Chevron Stock Set for a Rebound?
Chevron stock received its second analyst upgrade in as many days, boosting hopes for a recovery in the lagging energy major.
By Dan Burrows • Published
Retirement Planning with Life Insurance
An indexed universal life insurance policy can help you with tax mitigation and extra retirement income in addition to death benefits for your beneficiaries.
By Mike Decker • Published
Which Retirement Accounts Should You Withdraw From First?
Here’s a standard order for when you should tap which account when you’re in retirement.
By Evan T. Beach, CFP®, AWMA® • Published
Are You Worried About Running Out of Money in Retirement?
Planning that integrates income annuities can help alleviate the No. 1 fear of retirees, even in worst-case investment scenarios and when living way beyond your life expectancy.
By Jerry Golden, Investment Adviser Representative • Published
How, Like Indy, to Outrun the (Retirement) Boulder
To get to a comfortable retirement, ordinary people often fight larger forces, like the characters in Steven Spielberg movies. Here’s how you can fight those forces.
By Phil Wright, Certified Fund Specialist • Published
Beware the Retirement Hazard Zone: Those Years Right After Age 59½
The decisions you make in the four to five years right after you hit that pivotal age can have a big impact on the rest of your retirement.
By Chris Abeyta • Published
Cover Your Retirement Income Bases With Scenario Planning
Here are three strategies to help you plan for best- and worst-case scenarios, positioning you for retirement success.
By Chuck Bigbie, CLU, ChFC®, CFP® • Published
Six Key Housing Factors to Consider as You Age
Can you age in place, or do you need to move? And ice cream might actually have more to do with making tough housing decisions than you think.
By Thomas C. West, CLU®, ChFC®, AIF® • Published
To Create a Better Plan for Retirement Income, Start Earlier
Let’s explore how to figure out how much income your savings can generate at retirement and how to build a better plan when retirement is five or 10 years away.
By Jerry Golden, Investment Adviser Representative • Published