Retirement & Divorce: Essential Considerations

Divorce is a challenging and overwhelming process, but it's crucial to focus on future planning, including retirement and related issues. Retirement plans, Social Security benefits, insurance needs, and estate documents are critical areas that can be easily overlooked but are crucial for the later years.

Dividing retirement benefits is a crucial consideration in divorce settlement. There are several plan types, including those provided by the Federal government, individual states, counties, municipalities, and unions. Each plan may have different rules and regulations, and retirement benefits can be valued by several different methods, each of which may provide different results. Therefore, it is essential to carefully examine the valuation of retirement plans such as Individual Retirement Accounts (IRAs), pensions, 401(k)s, 403(b)s, thrift savings plan (TSP), profit sharing, money purchase, stock options, annuities, and deferred compensation plans.

One way to value retirement benefits is to calculate the total contributions made along with the accrued interest. Another method is to calculate the present value of future benefits expected to be received after retirement. Finally, a determination can be made of a percentage of the future benefits earned by the employed spouse to be allocated to the non-employed spouse. The method used will depend on the circumstances of each individual situation.

If you need to transfer benefits within an employer-sponsored plan subject to the Employee Retirement Income Security Act (ERISA), a Qualified Domestic Relations Order (QDRO) must be approved by both the plan administrator and the court. Dividing an IRA is often simpler. A one-time distribution from an IRA may be rolled directly into a former spouse’s IRA without being subject to taxation or the 10 percent early withdrawal penalty if under age 59 ½.

Another critical aspect of divorce settlement is Social Security benefits. A spouse with a lower income may not realize that they could draw Social Security benefits based on the former spouse’s retirement benefit. For example, if the couple had been married for at least 10 years, the wife would be entitled to half of her ex-husband’s Social Security Retirement Benefits if he is eligible for benefits, she is not married, she is at least 62 years old, and her own Social Security Retirement Benefits would be less than that of her ex-husband.

An ex-wife who is at least 62 years old and has been divorced for at least two years would be able to receive benefits based on the earnings of her ex-husband regardless of whether he has retired or applied for benefits. If her ex-husband dies, she may then be entitled to a widow’s benefit based on certain conditions, including that her ex-husband was entitled to Social Security benefits, they were married for at least 10 years before the divorce was final, and her own benefits are not greater than what she would receive as a widow.

Life insurance may also be a consideration in long-term financial planning. For example, if one spouse is eligible for a pension and the other will receive a lifetime benefit as part of the divorce settlement, purchasing term insurance to cover the pre-retirement period would ease any uncertainty. Additionally, purchasing life insurance on the spouse providing spousal maintenance and/or child support would help ensure the continuity of this income stream should that individual die prematurely.

Finally, it's important to revise estate documents early in the separation process to ensure that the appropriate individual is named to act on one’s behalf. Waiting until a divorce is final can be problematic should one pass away while separated. Even with a seemingly minimal estate, it's beneficial to create a will. When a person dies intestate, or without a will, there is no testamentary evidence of that person’s wishes as to how the estate is to be divided. This requires probate court intervention, and property is distributed based on state law.

In conclusion, divorce is a complex process that can have long-lasting financial implications. It is important to approach the divorce settlement with careful consideration of retirement and related issues such as Social Security benefits, insurance needs, and estate documents. Dividing retirement benefits can be a complicated process that requires careful examination of the different valuation methods, plan types, and regulations. Seeking guidance from professionals can help ensure that retirement assets are divided fairly and in compliance with applicable laws.

Social Security benefits can also play a significant role in the financial well-being of both spouses after a divorce. Understanding the eligibility requirements and potential benefits can help ensure that both parties receive the support they need to achieve a secure financial future. Finally, revising estate documents early in the separation process can ensure that the appropriate individuals are named to act on one's behalf and that assets are distributed according to the person's wishes.

While divorce can be an emotionally charged and stressful experience, it is important to prioritize financial planning and consider the long-term implications of the settlement. By carefully examining retirement and related issues, seeking professional guidance, and taking proactive steps to ensure the security of one's financial future, individuals can move forward with confidence and peace of mind.