4 Divorce Mistakes That Can Derail Retirement
If you’ll be splitting up after 50, avoid these financial errors that could sting for years
ING Retirement Coach Marilyn Timbers is a financial adviser with ING Financial Partners who specializes in divorce planning. A certified financial planner and certified divorce financial analyst, she serves on the ING Financial Partners’ Women’s Advisory Network Board.
So men and women who find themselves suddenly single in midlife need to plan carefully and make thoughtful decisions about such things as how to divide up assets and the best ways to handle the money they’ll receive.
(MORE: Divorce After 50 Calls for Special Money Strategies)
Women and men tend to have very different retirement fears during divorce proceedings.
Women are more likely to question whether they’ll be able to afford to retire. This is often a legitimate fear. The ING U.S. study found that divorced women had $34,000 less than divorced men in total retirement savings.
The most common retirement fear for divorcing men is whether they will be forced to delay the date by a few years because they’ll need to dip into retirement savings to pay out alimony or a share of household expenses.
You can minimize the financial damage to your retirement by avoiding these four common mistakes:
1. Blithely choosing the house over other financial assets Many people assume that when figuring out how to divvy up assets in a divorce, you’re best off keeping the house. But this isn’t necessarily true.
Compared with retirement savings, a home is more likely to have ongoing and unexpected expenses and its future value is more of a question mark. You’ll also have a tougher time using your house to finance retirement than the money you’ve salted away in a 401(k) or IRA.
In addition, a well-diversified savings fund offers you more assurance about how much retirement income you’ll receive.
(MORE: The Out-of-Court Dividing of Assets After a Divorce)
If you'll be weighing who’ll get the house and who'll get the retirement funds, be sure to consider the potential appreciation value of the home and tax consequences for receiving either asset.
2. Ignoring the tax implications of retirement funds It’s important to remember that with a pre-tax account, like a 401(k), 403(b) or Individual Retirement Account (IRA), Uncle Sam will take his share when you withdraw money in retirement. On the other hand, withdrawals from after-tax savings vehicles – such as a Roth IRAs – aren’t taxed when the money is taken out during retirement.
So, for example, if one person in a divorcing couple will be entitled to a $500,000 401(k) and the other will receive a $500,000 Roth IRA, the division of assets is not equal due to the different way each will be taxed. The Roth IRA will provide a bigger payout.
3. Rolling a spouse’s retirement account directly into an IRA immediately after divorce There’s actually a one-time opportunity for divorcing spouses under age 59½ to withdraw money from their ex’s 401(k) or 403(b) without owing the normal 10 percent tax penalty. The only catch is that the assets must have been allocated to them under the qualified domestic relations order, or QDRO.
So if you’ll be receiving your spouse’s retirement account and will need to tap it to pay for some unavoidable divorce expenses, you may want to make the withdrawal rather than doing a rollover. Otherwise, if you roll the money into an IRA then need to pull some out for divorce costs, you’ll be subject to the standard 10 percent early-withdrawal penalty if you're under 59 1/2.
(MORE: Taxes and Divorce: 6 Tips for Women)
4. Dipping too much into retirement savings because of the tax penalty waiver Sometimes, divorcing men and women under age 59 1/2 fall into the trap of taking out too much of the retirement savings they receive just because they can avoid the 10 percent withdrawal penalty. They think they should pull out a little extra “just in case” they’ll need the money.
I often have to remind my divorcing clients over 50 they’ll need to live on these savings for 20 to 30 years in retirement.
So if you’ll receive a retirement account in your divorce, take the time to assess your current and future cash flow. Pencil out your current budget and forecast how much you’ll need to live on in retirement.
Knowing these figures will help you avoid making an excessive withdrawal that could result in spending too much money now and regretting the decision in the future.
Understandably, it’s hard to maintain a clear head while going through such an emotional event. But since you won’t have much time to recover from a major mistake, it’s especially important to work things out with assistance from financial and legal professionals. They’ll help you steer past potential troubles and make it through rough waters, so you can look forward to a long and happy retirement.
Securities and Investment advisory services offered through ING Financial Partners, Member SIPC. Neither ING Financial Partners nor its representatives offer tax advice.
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