Incorporating financial planning into the divorce decree
Gray divorces, that is divorce between retirement age spouses with long-lasting marriages requires careful consideration and planning by both spouses. Generally, older couples aren’t worried about custody of the kid or kids but instead they need to worry about things like pensions. Roughly 1 in 4 divorces in 2010 occurred to people 50 and older according to a 2013 working paper from the National Center for Family & Marriage Research. If you consider that most Americans don’t have nearly the retirement funds they are likely going to need by the end of life and then you split those funds between the couple, you’re likely to find that both halves of the equation will have to consider whether working longer is in their future.
Dividing pensions, benefits, HSAs, and retirement funds creates long-term effects for both parties and shouldn’t be taken lightly. Sometimes people make the emotional decision to keep the house and give up too much of the financial assets but failing to make good decisions about splitting assets can cost hundreds of thousands of dollars in retirement. If you’re planning to divorce:
- Consider hiring a financial advisor to maximize claims for Social Security benefits, funds from 401(k) plans and divorce settlements even before hiring a divorce lawyer. Retirement is considerably more expensive for a single person (man or woman) than it is for married couples. (Read this article on why marriage is a boon to retirement planning.) Another area that a financial advisor can help with is in taxable issues. Taxes can reduce seemingly hefty retirement benefits. Knowing how to successfully move those funds to other retirement accounts without experiencing a tax hit can preserve the value of the assets.
- Consider the impact on your business. An increased value of a business during the life of a marriage must be divided. This often means selling that business in order to pay the spouse for his or her half.
- Consider the confusion. Federal courts determine the guidelines for dividing funds in a 401(k) plan, yet state law dictates how IRAs are divided. This can confuse things for many people. In addition, pension plans require a properly prepared qualified domestic relations order (QDRO) to allow accounts to be separated, withdrawn and deposited in retirement accounts without penalty.
- Consider how insurance policies might play a role. Insurance goes beyond your medical care. It incorporates life insurance, property/casualty and disability insurance. If one or the other parties requires child support or alimony to avoid being financially devastated, you’ll need a life/disability insurance policy to cover you financially in case something happens to the ex-spouse.
- Consider who you have listed as beneficiary. Change the beneficiary designations of all retirement accounts. It can’t be said enough. Far too often, people experience a major, life changing event and then they fail to update their documents to reflect that change.
A thoughtful, final divorce decree can help eliminate some of the arguing associated with divorce and can help keep both parties out of the poor house. Protect your assets by hiring who can look at the financial aspects of divorce through a wider lens.