Divorce later in life can shake the foundation of even the most carefully laid retirement plans. While the idea of starting over financially may seem daunting, understanding how to divide retirement assets and exploring collaborative solutions can help you to meet this challenge.
Adjusting Your Retirement Goals
It is important to acknowledge that your retirement plans may need to change post-divorce. The extent of those changes will depend on several factors, including your assets, your age, and whether there are spousal support obligations. For those with substantial financial resources, the financial impact may be small or not exist. However, for most couples, dividing assets lead to changes in retirement timelines or lifestyles.
If you plan to retire early (before age 65), divorce will likely mean working longer to rebuild savings, or supporting your child or ex-spouse. If your spouse was a stay at home parent or spouse, it may take some time for them to re-enter the workforce. These factors may mean changes to your retirement plans, even if you and your spouse had agreed upon early retirement dates during your marriage.
Dividing Retirement Assets
How to divide retirement assets depends largely on whether the plan is a defined benefit plan, such as 401(k)s and IRAs, or a defined benefit pension plan. Cash-based defined contribution accounts like 401(k)s or IRAs are relatively straightforward to split using a court order directed to the retirement administrator. This order directs the retirement plan manager to transfer the non-employee spouse’s community share of the account to an account in their name, usually a roll-over IRA. Income taxes are paid when funds are withdrawn.
Pensions, or defined benefit plans, are more complex to divide. Key decisions about how benefits are paid—over your lifetime, your ex-spouse’s lifetime—will significantly impact the monthly amount received. For example, electing to take benefits over your lifetime may increase your monthly payments, but leave your ex-spouse without their community property share in the event of your death after the plan is divided due to divorce. In such cases, legal separation or a post-marital agreement might offer a solution that avoids terminating marital status, while addressing the division of your assets.
Finding Creative and Collaborative Solutions
One of the advantages of opting for a Collaborative Divorce is the opportunity to craft creative financial solutions that work for you both. With the help of a neutral financial professional, you can explore alternatives that may not be available through court-ordered arrangements.
For instance, if a pension is a key income source for you both, discussions during the collaborative divorce process can explore how to equitably divide those benefits without leaving either of you in financial distress. In some cases, offsetting a spouse’s share of a pension with other assets can be an option.
Moving Forward
Divorce doesn’t have to derail your retirement dreams entirely. The right approach can help you and your spouse reimagine your futures in a way that balances financial responsibility with personal fulfillment. Collaborating with financial and legal professionals will mean that your and your spouse’s necessities to be met and may leave room for the occasional splurge in retirement.
Though it may take time to adapt, remember that life after divorce—and retirement—is a new chapter, filled with opportunities for growth and reinvention.
Lisa R. Murray is an experienced attorney in the Collaborative Divorce and Mediation processes. She can help you determine the goals for your “gray” divorce and your post-divorce life. She can be reached at 650-523-8262.