How Divorce Affects Retirement Benefits

Late-life divorce can impact pensions, 401(k)s, IRAs, and Social Security benefits

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Divorce after age 50 can severely disrupt your retirement plans. Access to pensions, retirement account balances, and Social Security benefits are all impacted by both marriage and divorce. U.S. News asked Janice Green, a family law attorney in Austin, Texas and author of the new book Divorce After 50: Your Guide to the Unique Legal and Financial Challenges, how a late-life divorce typically affects retirement assets. Excerpts:

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What should you do before a divorce to make sure you are still able to retire?

The first important thing to do is to get a summary plan description of the employment-related retirement plans and see what those say about the pension and 401(k). The next step, after you know what you’ve got, is you’re going to have to value it. Let’s say husband has $100,000 in his 401(k) account and it’s all marital property and he’s 55 years old. That money is obviously not the same in value as $100,000 in a CD somewhere or in a money market account because you can’t get it without penalty and paying taxes on it. But we don’t know when you’re going to take it. We don’t know what tax bracket you are going to be in. The closer and the older people are the less speculation there is in reducing that 401(k) by some factor of estimated income taxes that you would owe if you were to pull that money out.

How do ex-spouses typically split 401(k) and IRA balances?

You can award it all to one spouse or you can divvy it up. If a husband has been paying into that 401(k) or IRA prior to marriage then his separate estate would have a claim to part of that retirement account. In some states they look at the balance on the date of the marriage as his property and everything after that is subject to the division. It’s really wise to divide them by percentages so that it’s not dollar divisions. If you divide it by dollars and the market takes a plunge after the time you reach an agreement, that split is going to be affected. Let's say the value of that account was $500,000 when they reached an agreement and dropped to $350,000 at the time it was divided up. If you have made an award to the wife of $250,000, the husband is going to get nailed because he is sitting there with $100,000, not $250,000. That can make people very unhappy. If there is an upswing in the market, in value, then you may want to allocate that.

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What if you started saving for retirement before marriage?

If a husband had put in some money prior to marriage, contributed during marriage, and then there was a divorce, his separate estate has an interest in that retirement plan. You have to carve that out and value that part. It may not be that his entire account is marital property. There can be some tracing out of separate property within that pension plan. He may be putting in work time after the divorce before he reaches retirement age and that could be his separate estate’s interest.

What happens to a pension plan when you get divorced?

A spouse can buy out the non-participant spouse or give them a share of the benefits. Let’s assume the husband has earned the pension through his employment and the wife does not have her own pension. You could place a value on the pension and give it all to the husband and let the wife receive property of equal value. The usual way to achieve a value is though an actuarial analysis of all the elements of the pension plan. Or you could divide the pension by a court order that is 50/50 or some other division. She gets a percentage of whatever his benefit is. You are taking how much of the work time in that pension plan was linked to time during the marriage. A lot of people will opt for dividing the pension equally to avoid having to do an actuarial evaluation.

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How does divorce affect spousal Social Security benefits?

They have to be married 10 years for one spouse to avail themselves of the other’s Social Security, if the spouse doesn’t have work credits that exceed half of her ex-husbands. If you’ve got a couple where they have been married for nine and a half or nine and a quarter years, I certainly would be unhappy if I were a spouse and missed getting eligibility for those types of benefits and I needed those benefits. I have slowed down divorces to ride out that eligibility time. I have had situations where the court allowed continuances. It is no skin off the Social Security check of the person that the work credit was created by. In the case of death, the benefit that you can claim is 100 percent of what the now deceased former spouse’s retirement check would be. It’s not limited to the most recent spouse or current spouse. If the guy had serial marriages of 10 year spans and none of his three wives have benefits that exceed his benefits, all three of them can withdraw 100 percent survivor’s benefits.