The cost of a divorce is often very high, with legal fees and splitting up of a household. However, a real challenge is a divorce and trying to continue with your retirement savings intact, according CNBC in “This move is almost as bad for your retirement savings as the Great Recession was.”
Statistics show that approximately 40% of all marriages end in divorce. Researchers at Boston College behind the National Retirement Risk Index examined how likely individuals are to maintain their standard of living, once they retire. As of 2016, half of working-age households were reported to be at risk. Divorce pushes up a retirement risk for a person by 7 percentage points, while the 2008 financial crisis added 9 points.
Here are more reasons why divorce deals a tough blow to retirement:
- In addition to legal fees, divorce proceedings pull people away from work and can have an impact on their earnings abilities, especially women.
- Many divorces lead to the sale of the family home, which creates a major financial burden. If your marriage falls apart when the housing market does, the impact will be even worse.
- It’s more expensive to run two households, than it is to run one.
- Tax rates change when couples divorce.
Dividing up a 401(k) when only one spouse was working can be tricky. You’ll need a court order known as a QDRO (a domestic relations order) to divide the account. The nonparticipating spouse of a 401(k) can typically receive funds from their ex’s as cash and not have to pay a tax penalty for the early withdrawal. However, that money should be set aside for retirement. The money is often used to pay off debt or to fund the purchase of a new home. That means there is much less available for retirement.
Once the financial dust has settled, experts recommend reviewing both your retirement plan and your estate plan. You’ll want to make changes on documents, including life insurance policies and any assets where your former spouse was listed. There may be court orders concerning retitling accounts.
An estate planning attorney can advise you in reviewing your estate plan during a life-changing event, such as a divorce.
Reference: CNBC (June 28, 20918) This move is almost as bad for your retirement savings as the Great Recession was”