Divorce will change your life in profound ways. One of the possible changes that comes from a marriage ending: a reduction in retirement security.
That's right, ending your marriage could mean you have a harder time during your senior years. That's according to the Center for Retirement Research, which conducted a comprehensive analysis of how divorce is likely to impact your financial stability in retirement.
While Center for Retirement Research (CRR) has lots of warnings for divorcees on the effect of a marriage ending, the good news is that awareness of how divorce affects retirement allows you to take steps to mitigate the impact and ensure you'll still have plenty of money as a senior.
How divorce affects retirement security
According to CRR, divorce has both short-term and long-term financial consequences that can make you less financially secure in your retirement. These factors include:
- Legal fees and divorce-related expenses.
- Long-term increased costs of maintaining two separate households.
- The sale of a home, which often occurs in divorce, which could occur at a suboptimal time in the housing market, and which involves transaction costs. For many couples, a home is their greatest asset and an important wealth-building tool that is lost.
- The division of retirement assets and financial assets between two households.
- A potential tax increase, as higher-earning spouses are taxed at a lower rate if they file jointly with a lower-earner. This benefit is lost when the couple can no longer file as married filing jointly.
- Increased difficulty saving. For women, this often occurs due to ongoing child care responsibilities, while for men it may occur due to ongoing spousal and child support obligations.
- A reduction in available credit for each spouse, as they are not able to combine their incomes to increase borrowing power.
Because of all these factors, the average net financial wealth of nondivorced households is around 30% percent higher than the average financial wealth of divorced households.
With less wealth comes a greater risk of financial insecurity during retirement. In fact, while 48% of non-divorced households are considered to be at-risk of financial instability when they reach retirement, 53% of households that have gone through a divorce are considered to be at-risk. A household is considered at-risk when their projected retirement income is too low to allow them to maintain their standard of living during retirement.
What can you do to protect your retirement after a divorce?
While divorce will always impact your finances, there are steps you can take to try to reduce the risk to your retirement security that comes with ending your union. Some of those steps include:
- Staying married for at least 10 years: If you are able to hit the 10-year mark, you can become eligible to claim Social Security benefits on your ex-spouse's work record. This could allow you to claim much higher benefits if your spouse makes more than you. So, if you're close to this milestone, you may want to delay your divorce a little bit.
- Negotiating an out-of-court divorce settlement: You can significantly reduce the costs of divorce if you can compromise on the issues instead of having a judge litigate everything. If you and your ex are both open to compromise, you'll both often end up with much more money after the divorce -- with less cash lining your respective lawyers' pockets.
- Adjusting your lifestyle after divorce to prioritize saving: It may be too costly to maintain your home or your previous standard of living once you have divorced. You should adjust your expectations quickly and downsize your costs if necessary so you can still prioritize retirement savings, creating and living on a budget that recognizes your financial resources and challenges.
- Knowing your rights in divorce: You may be entitled to receive a portion of your spouse's pension or 401(k) benefits. While the funds may not be accessible to be divided during your divorce, the judge can enter a Qualified Domestic Relations Order specifying that the assets will be shared in retirement.
Center for Retirement Research indicated your risk of financial instability is higher after divorce even if you have remarried, so you can't count on a new union to solve your retirement issues -- you need to make retirement savings a priority.
Don't let divorce derail your retirement
Divorce is emotionally and financially challenging. While it can be hard, just remember to fight for your future during divorce by making the right choices on how to prioritize retirement savings. When you hit your senior years and you have the money you need to live comfortably, you'll be glad that you kept retirement on your mind even as you coped with the end of your marriage.