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The Impact of Divorce on Retirement Planning

It is probably no surprise that many Americans will not be able to maintain their pre-retirement standard of living when they retire. Often, retirees find that they must sell their home, obtain a reverse mortgage or take on at least part-time employment after retirement. Approximately 50% of retirees discover that they do not have enough retirement to support the bills they traditionally paid before retirement. Retirees often find that they must “downsize.”

According to the Center for Retirement Research at Boston College, the risk of not having enough money to maintain the pre-retirement standard of living is 7% higher for households in which at least one person has gone through a divorce. Thus, careful planning when going through a divorce and when entering retirement after divorce is essential to avoid major financial challenges.

Retirement assets such as 401(k) plans, pension plans, traditional IRAs and Roth IRAs are typically divided by the parties as part of a divorce. However, an equal split of these assets is not guaranteed, and one party may find that he or she gets significantly less than 50%. Sometimes, that is because one party has retirement assets that existed prior the date of marriage. Sometimes, a party wants to trade retirement assets in order to keep the marital home, without focusing on the costs to maintain the home, the fact that the home is not a liquid asset, and that there will be closing costs if the house is sold later. Tax consequences often are not considered in making decisions about how to divide retirement assets. Division of pension plans can be especially tricky. One spouse should not get all Roth IRAs while the other gets the traditional IRAs.

In fact, a recent study shows that, in roughly 50% of all divorces, all the retirement assets went solely to one spouse, leaving the other spouse with no retirement assets at all.

The Tax Cut and Jobs Act – the tax reform package enacted in 2018 – also will have significant impact on divorced retirees and could well add to the strain of maintaining the pre-retirement standard of living. Divorced persons must plan for the retirements and for their financial security.