Splitting from a spouse? It may be painful, but don’t forget the long-term view.
Getting your retirement nest egg through a divorce takes more time, patience and short-term cash than many people can muster during such a traumatic period.
Often, this leaves them vulnerable to problems down the road, said financial planners who cater to divorcing couples. And when the split happens near retirement, it can be particularly painful.
“A lot of people [at or near retirement] just stay in unhappy marriages because the economics are more than they can contemplate. They look at what they’ve built, which often isn’t as much as they’d hoped, and then divide that by two, and it isn’t enough,” said Jamie Lapin, a Rockville, Md., planner with Risk Management Group Inc.
But if you are divorcing, what should you do? Take care of the here and now through alimony and child support, but value your marital assets smartly so you can salvage, not sabotage, your golden years, experts said.
Many couples have retirement accounts, taxable investment accounts and property to divide in a breakup, and their values often are intertwined in a final settlement.
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Some tend to place a high value on retaining the marital home after a divorce, experts said. They don’t consider the tax implications of selling the property (only $250,000 is excluded from capital gains tax if they are single), and they don’t compare the net value with the after-tax value of the retirement accounts, Lapin said.
Or a spouse may agree to take a retirement account without factoring in the income taxes that will be due immediately if it is withdrawn, although divorcing couples do get a one-time reprieve from early withdrawal penalties if they cash out.
Avoiding mistakes such as these is vital, experts said.
A few tips:
Learn the lingo.
How you and your spouse divide the workplace retirement accounts needs to be spelled out in a qualified domestic-relations order, which documents who is paying alimony and child support and how much, as well as how marital property will be divided. A 401(k) plan earned at least partly during the marriage, for example, typically would be considered marital property.
But the rules surrounding these orders can vary, depending on how the plan is organized. Some call for specific legal language in the order that can be missed if an attorney is unfamiliar with the plan, or they might not pay out benefits immediately, no matter what is in the order, Lapin said. She recommends asking an employer early in the process for a prototype document that is acceptable, so your attorney can draft something that complies.
Know your benefits.
Some company retirement plans are structured in a way that prevents anyone from withdrawing funds until a certain age, despite what a divorce decree says, Lapin said.
Focus on values.
Amicable splits usually cost less, but there are times when just dividing up assets yourselves isn’t wise and it’s best to hire an actuary to put a present value on your nest egg. A simple evaluation might cost about $500, but more complex cases could be several times higher, said Mark Altschuler, president of Pension Analysis Consultants in Elkins Park, Pa.
You probably can skip this step if you have relatively low-balance, defined-contribution plans that were earned entirely during the marriage, he said, and not too much time has passed since you technically split into two households. The value of marital property can fluctuate greatly if the process spans several years, and state law varies as to when the marital property period ends.
If necessary, ask your attorney or financial planner to recommend an actuary.
When your ex is federal government employee.
Be sure your attorney uses the language for divorce decrees that conforms to the standards of the U.S. Office of Personnel Management, said Tammy Flanagan, senior benefits director for the National Institute of Transition Planning Inc., a private company that works with government employees on retirement issues.
Remember your health.
Within government plans, an ex-spouse who takes other assets in a settlement and gives up access to the retirement plan also loses access to the health plan, Flanagan said. Private employer rules on health plans vary, so it pays to check early.
Don’t forget Social Security.
Many couples are unaware that former spouses typically are eligible for Social Security spousal benefits if the marriage lasted at least 10 years, even if the higher earner remarries, said Stacy Francis, co-founder of the New York chapter of the Association of Divorce Financial Planners Inc.
“I’ve had people call me who’ve been married nine years, and [once they hear this] they decide to wait a little longer” to divorce, said Francis, also president of Francis Financial Inc.
“Divorce planning is very much a dance between long-term assets and liquid accounts, and when people are in survival mode, the long-term perspective can get lost.”
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