Retirement and Divorce: Protecting Your Finances When Marital Bliss Turns Sour
Six steps to take as you negotiate a “gray divorce” that can help defend the financial future you’ve worked so hard to achieve.
It’s a phenomenon that’s becoming more common. Older couples with decades of marriage behind them discover that they’re no longer compatible and they decide to divorce, a move that can wreak havoc on retirement plans.
Unfortunately, while many of these over-50 people think they somehow are going to win in a divorce, they soon learn it’s more likely that financial trouble lies ahead.
That’s why it’s critical to understand the potential repercussions of so-called “gray divorce” so you can be prepared for what’s coming, and aren’t ambushed by the realization that your retirement dreams may need to be recalculated.
A few things to do or to keep in mind if you are headed toward a gray divorce include:
1. Take inventory of everything you own – and everything you owe.
In a lengthy marriage, you likely acquired a number of assets. It’s time to take an accounting of them. Run down the list: houses, boats, cars, retirement accounts and anything else of value. Then likewise, tally up what you owe — mortgage, car payments, credit card debts. Subtract those debts from the assets and you have your estate’s value.
One thing I often see during this particular exercise is that women are at a disadvantage. While situations vary, in many marriages the husband handled the finances and even may have had accounts or debts the wife knew nothing about.
Another factor to be aware of is that retirement accounts sometimes come with restrictions about how they can be distributed. A judge may need to sign a qualified domestic relations order so that the spouse whose name isn’t on the account can receive payments from it.
2. Understand the implications of pensions.
That pension you earned after decades of toil, and are counting on to see you through retirement, could be divvied up. An example: I became involved late in the process in the case of a couple planning a divorce. The wife had worked steadily in state government for decades and retired with a solid pension. The husband had a muddled job history and minimal retirement assets. The wife was caught off guard when she learned she would have to split her pension with her soon-to-be ex-husband. With that blow to her monthly income, she had to go back to work in retirement.
3. Realize you may be wrong about what belongs to you.
In a typical divorce, the assets you bring into the marriage usually belong to you, and everything that came after that is subject to being split. But there could be exceptions. I encountered a situation recently with a same-sex couple where it didn’t work out that way.
Their relationship began long before same-sex marriage was legally recognized. So, the judge made decisions about splitting assets based on how long the couple had been together, not how long they were legally wed. In the judge’s view, they would have been married much longer had it been legal. As a result, one of the two gave up far more assets than she anticipated or that she thought was fair.
4. Be prepared: Annuities can get complicated.
If you have an annuity, you need to understand its provisions and whether it can be split down the middle. The answer is sometimes yes, sometimes no. Beyond that, there could be fees or penalties associated with splitting it. Just recently I was advising a divorcing couple whose annuity did not allow a split. Through some special financial and legal maneuvering, it was arranged for them to keep the annuity with the payments deposited into a joint bank account. They then split the money on their own.
5. Keep beneficiary designations up to date.
Beneficiary designations become key when you go through a divorce. Most spouses name each other as beneficiaries, and in some cases you may be required to keep the former spouse as a beneficiary if there are child-support issues. Most of the time, though, you will want to change your beneficiaries. If you neglect to do so, there could be surprises for your heirs when you die since a divorce decree does not trump a beneficiary designation. Your children or a new spouse could learn that your ex-spouse is the one who inherits a valuable asset.
6. Consider establishing a trust.
If after your divorce you enter a second marriage, and you and your new spouse each have children, you may want to consider establishing a trust. Otherwise, if you die first, your new spouse could leave everything to their children, meaning you would have effectively disinherited your own children. A trust can help you avoid that.
All of this may seem overwhelming — and it is — but it’s important to gather as much knowledge as you can to help you better plan for whatever lies ahead.
In many cases, as you work your way through these and other issues, you will find that you need the involvement not just of a divorce attorney or a financial professional, but both.
Each has a different expertise that can benefit you as you navigate your way down the tangled divorce trail in search of a new and inviting path for your life.
Ronnie Blair contributed to this article.
The article and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you consult your accountant, tax, or legal adviser with regard to your individual situation. Securities offered through Kalos Capital Inc. and Investment Advisory Services offered through Kalos Management Inc., both at 11525 Park Woods Circle, Alpharetta, GA 30005, (678) 356-1100. Retirement Income Strategies is not an affiliate or subsidiary of Kalos Capital or Kalos Management.
About the Author
Founder, Retirement Income Strategies
Kristian L. Finfrock is the founder of and a financial adviser at Retirement Income Strategies. He is an Investment Adviser Representative of Kalos Capital and a licensed insurance professional. He resides in Evansville, Wisconsin, with his two daughters.
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