Divorce After 50: The Impact on Retirement Savings

Divorce after 50—the rate of which has doubled since 1990¹—can have an outsize impact on your financial security. Indeed, parting ways with your spouse can potentially halve your assets while doubling your expenses, which can be especially detrimental when you don’t have decades to regroup and rebuild.

“After a long marriage, there’s a greater likelihood that much of a couple’s wealth resides in assets acquired together over the years,” said Bob Barth, a Schwab wealth strategist based in Orlando, Florida.

How those assets will be divided varies considerably depending on where you live. For example, in the nine community property states—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin—all earnings and everything acquired with those earnings during the marriage are generally divided 50/50. In common law states, on the other hand, marital assets should be divided “equitably,” a standard that gives courts considerable discretion in deciding what’s fair. In addition, some common-law states, such as Florida and Tennessee, have recently added new laws allowing Community Property Trusts (CPT), which allows married persons to convert their property into community property. Extreme care should be exercised both in the creation of a CPT and in the case of divorce by a couple with a CPT.

Even assets that are understood to be separate—such as certain types of inheritances (see “Whose inheritance is it, anyway?” below)—may still figure into how a court decides who gets what. “You’ll want the help of your financial advisor, an accountant, and a lawyer well-versed in state-specific rules,” Bob said. “Divorce is complicated, and there are a lot of different ways you can approach it.” In addition, these rules are constantly evolving in the law.

For older couples, sources of retirement savings can loom especially large—because of both their size and how soon you’re likely to need them. What’s more, such assets often are governed by their own rules regarding how they can be divvied up. With that in mind, let’s look at three assets of special relevance to later-in-life divorce.

By law, 401(k)s and individual retirement accounts (IRAs) can have only a sole account holder. However, the money that goes into such accounts during a marriage technically belongs to both parties. As part of the divorce settlement, the spouse with a higher balance may need to transfer funds to the other spouse’s account.

In the case of divorce, the 401(k) funds of both spouses require the filing of a qualified domestic relations order (QDRO) with a state-level domestic-relations court to spell out how they want the money divided. Each spouse should keep these three things in mind:

• The most tax-efficient method for the receiving spouse is to roll such funds directly into their own retirement account.
• The receiving spouse can also qualify to have some 401(k) funds distributed directly for immediate expenses. (Such distributions are exempt from the 10% early withdrawal penalty for those younger than 59½, though the receiving spouse would still be subject to 20% withholding for federal taxes plus any applicable state taxes.)
• Any funds transferred directly to the receiving spouse cannot later be deposited into that spouse’s IRA, and any rollover to an IRA must occur within 60 days of the receipt of the money, otherwise, the IRS will consider the funds taxable income (minus the 20% withholding).

QDROs don’t apply to IRA assets. However, a direct rollover from one spouse’s IRA to another spouse’s IRA—again, the most tax-efficient method—can occur only if outlined in the divorce settlement and filed with the plan custodian.

Alternatively, account holders worried about jeopardizing their retirement savings might instead be able to relinquish other assets—a greater stake in the equity of a home or the contents of an investment account, for example—to satisfy their financial obligations to the other spouse.

“Either way, states have a vested interest in seeing that no one comes out of a divorce facing unnecessary financial strain,” Bob said. “So, when a married couple has saved successfully for retirement, those funds are generally used to ensure that both parties end up financially secure.”

The court typically considers a defined-benefit pension that one spouse earned during the marriage as a shared asset too. “This can become an emotional issue,” Bob cautioned. “If one spouse has put in the time to earn a pension, he or she may feel territorial about it.”

As with a 401(k) or an IRA, a qualifying spouse would be entitled to only that portion of the pension earned during the marriage. However, pension plan rules, state laws, and whether a spouse has already begun receiving payments can make divvying up pension assets more complicated than parsing retirement accounts.

If only one spouse has a pension, he or she may wish to offer up other assets of equal value rather than haggle over the pension itself. When both spouses have a pension but they’re of unequal value, the spouse with the larger pension might make up the difference by purchasing a single premium life insurance policy and naming their former spouse as the beneficiary rather than forfeit a portion of his or her pension.

“In both cases, you’re offsetting the amount your ex would have received from your pension with something of equal value,” Bob explained.

In contrast to retirement accounts and pensions, which may be subject to a lot of wrangling and compromise, the handling of Social Security benefits in divorce is controlled by law and is rarely open to interpretation. “The Social Security benefit is what it is—though keep in mind it may become part of the larger discussion around who gets what, which can itself be contentious,” Bob said.

If the couple was married for at least 10 years before splitting, the ex-spouse is eligible to apply for monthly benefits worth up to 50% of the higher earner’s full retirement-age benefit. (If the lower earner remarries, however, he or she forgoes any claim to such benefits in most cases.)

This ex-spousal benefit in no way affects the benefit of the higher-earning spouse—no matter how many times he or she has been married and divorced. “In that respect, this is a rare win-win—an ex-spousal benefit that costs absolutely nothing for the spouse on whom it depends,” Bob said.

Once your divorce is final, you should consider how your new situation impacts your current and future finances. Toward that end, revisit your financial plan to ensure you’re still on track to reach your goals. You should also update your will and account beneficiaries with your new situation in mind.

“Make sure you update your beneficiary designations, in particular, as soon as your divorce is finalized,” Bob said. “If you don’t, you run the risk of leaving additional assets to your ex, as some states don’t automatically nullify such designations after divorce.”

The truth is most people don’t plan for divorce—especially relatively late in life. But working with a financial advisor before, during, and after your split can help both parties get back on track as quickly as possible. “If you find yourself facing divorce and retirement,” Bob said, “there are definitely concrete steps you can take to limit the impact on your future.”