Divorcing later in life comes with its special set of complications, especially when you were planning on living off of the funds in your retirement accounts. You and your spouse accumulated enough wealth that you did not have to be overly concerned about money. However, now that the two of you are headed toward divorce, you can't help but wonder if your divorce settlement will be enough for you to live on.
Your primary Centennial residence, vacation home and other property will be part of the items you and your spouse will have to divide. In addition, the retirement accounts and pension plans will also take a leading role in the settlement process. Dividing retirement accounts can be a very complicated process that includes tax issues and other issues that require specialized treatment. If you are planning to divorce, there are some key factors you should keep in mind when it comes to dividing retirement accounts and pensions.
Retirement funds might be marital property
In general, any funds that you or your spouse added to the retirements during the course of your marriage are martial property in the eyes of the court. This includes contributions either of you made to 401(k) plans directly from your wages or deposits you made as individuals. Any money that was in the retirement account prior to saying your vows is separate property and will revert to its original owner when you divorce.
Even with part of the pension or retirement account, you'll need more
The longer you and your spouse have been married, the more substantial your retirement assets probably are. You likely planned for several decades worth of living expenses for you and your ex. Unfortunately, those amounts depended on you and your spouse sharing the house and other costs of living.
After a divorce, you will have only a portion of the money you saved and double the share of the overall expense. You won't just have to pay your share of a mortgage. You will have to pay the whole mortgage on your own.
It's easy to see how the amount you have saved simply won't cover everything, in most cases. However, that doesn't mean you should avoid retirement or divorce. It just means you need to be strategic about both. Working for a few extra years, increasing your savings or even selling some assets can all be ways to fund your retirement after divorce.
Look at your finances, and plan for a reasonable retirement
It can be hard to predict the exact outcome of the asset division process in a divorce. However, it's reasonable to assume that you should receive an equitable share of the assets acquired during your marriage. Predicting the exact amount is difficult, but you can probably come up with a broad estimate.
From that estimate, you can then determine how much more you will need to save in order to reach your retirement goals. In some cases, it may be necessary to review the goal you set for yourself in light of your new circumstances. You may need to save more to cover more expenses.
Alternately, you may decide to scale down your expectations for retirement, such as reducing your intention to travel. That might mean that you won't need as much money to retire. Don't discount the financial impact of the divorce either. Spousal support, child support and the actual cost of a divorce can all impact the assets you have available in retirement.
Qualified Domestic Relations Order (QDRO)
If you and your spouse have to divide a pension plan or 401(k), then the court must issue a Qualified Domestic Relations Order (QDRO). Some retirement accounts, such as an Individual Retirement Account (IRA) and military pensions do not require this order and instead have their own requirements for handling the accounts in a divorce. The QDRO is a set of instructions for the plan's administrator to follow in dividing the account and how the account should make payments to the employee's spouse.
Present the QDRO before the divorce
Before your divorce is final, you must present the QDRO to the plan administrator. Some plans will only make distributions over a period of time that typically begins at retirement age. This means that if you were counting on a lump sum distribution from a pension plan or retirement account, you may not get it. If you submit the QDRO before the divorce is final, you will find out how the payments will be structured and you will have a chance to renegotiate for a lump sum settlement that consists of other assets instead of the retirement account. By waiting until the divorce is final, you risk not having that cash immediately available to help with expenses and you will not be able to go back to court and ask for a different settlement.
If you are considering divorce, it is important to take appropriate steps to protect your interests, especially when it comes to dividing retirement accounts and other high-value assets. Your divorce attorney will help you work out a settlement that meets your needs.
