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Understanding how your divorce could impact your retirement

When people think of divorces, typically young couples come to mind. However, it is increasingly common for couples over the age of 50 to decide that it's time to call it quits. Sometimes, these divorces are the result of simply growing apart over the years. Other times, it's the result of restlessness due to empty nest syndrome. One spouse may have had an affair. There are many different reasons why couples who have been together for decades decide to divorce.

Getting divorced when you're approaching retirement can have serious consequences. That doesn't mean that you should stay in an unhappy marriage, but you absolutely need to plan carefully. Especially in cases where spouses cannot agree to terms for a divorce, the potential for major expenses ahead could have a negative impact on your ability to retire.

Ways in which divorce impacts retirement

When you started planning and saving for retirement, you did so assuming that the amount saved would support two people in one household, most likely. Splitting the amount in half could significantly reduce your ability to handle expenses. You could find you are not able to retire at the age that you had hoped. You may also have to downgrade your expectations about housing, travel and other aspects of your retirement.

In many cases of contentious divorce, funds could become depleted due to attorney fees and court costs. Protracted divorce battles are expensive, and they have a way of quickly eating though savings. Compound that with fees and tax penalties for early withdrawals, and you could end up with far less saved for retirement than you'd hoped.

Generally, courts divide retirement accounts

Regardless of which spouse made more money, who holds the retirement account or who made more deposits, retirement accounts and even employer pensions typically get considered as marital property. Unless there is a prenuptial agreement on record regarding retirement funds and pensions specifically, your retirement account is likely to get split as a result of the divorce. Typically, all assets and income earned during a marriage become marital property, shared by both spouses.

Sometimes, the courts decide to have retirement accounts directly split as a result of a divorce. Including this in a divorce decree is a court order. That, in turn, allows the person holding the account to request a split under a Qualified Domestic Relations Order (QDRO). The benefit of this kind of split is that QDRO divisions resulting from a divorce do not incur any special taxes or financial penalties.

It is also possible for one spouse to retain the retirement account. The value of the account may get deducted from other assets allocated during the divorce, such as equity in the marital home. Whatever way the courts handle your retirement account, you need to start planning right away to make up the lost funds and protect your retirement plans.