If life in a global pandemic and economic recession were not enough of a challenge, court records indicate that there has been an increase in divorce filings around the world. It seems that stay-at-home requirements have increased the tension between spouses and brought them to the breaking point.
It’s one thing to see young married couples part ways early in life. We often make poor decisions when we are you and we can generally bounce back from them. But the divorce rate among older (age 50+) people has been outpacing that of younger generations for several years.
When people divorce later in life, the consequences can be more serious. This is particularly true for women. Let’s consider the financial impact of divorce on women.
In general assets that were acquired before marriage are considered separate property. This property will often (but not always) follow the owner after divorce. Assets that were acquired during marriage are considered marital property. This property will be divided equitably between you and your spouse. If you live in a community property state (e.g. Washington or California), the rules are different and generally result in property being divided equally (i.e. 50-50).
If you and your spouse divorce, you will need to split up your assets. For most people their house is their most valuable asset. Since you and your spouse will no longer be living together, you will need to decide what to do with your home. One of you could remain in the home or you could both vacate it and find a new place to live. In either case, you will need to agree on the value of the house and how its value should be divided between you.
Your next most valuable assets are probably your retirement accounts. You will need to value and divide these accounts between you. You may have employer-sponsored retirement plans and individual retirement accounts. Retirement accounts that hold publicly-traded investments, such as a 401(k), 403(b), IRA, and Roth IRA are generally easily to value. Retirement pensions that will provide income are more difficult to value. It is often necessary to hire an actuary to value the pension and an attorney to write a Qualified Domestic Relations Order (QDRO) to divide the pension between the spouses.
Carefully dividing assets can help to minimize the financial impact of divorce on women.
Cash and Taxes
If you find yourself needing money while you are going through or emerging from divorce, you need to be aware of the taxes and penalties your actions may trigger. If you withdraw money from most retirement accounts (e.g. IRA) prior to reaching age 59 ½, you will pay ordinary income taxes and a 10% early withdrawal penalty.
It would be better to take withdrawals from other savings to free up cash. If you do not have access to liquid savings (e.g. checking, savings, money market accounts), then you could sell investments in a brokerage account. If the investments you sell have gained value since you purchased them, you will pay capital gains taxes. But the tax rates on capital gains are generally lower than those on ordinary income.
If your only option to raise cash is withdrawing funds from retirement accounts, then you need to see if you can do so through a QDRO. Funds distributed from a qualified plan under a QDRO will avoid the 10% early-withdrawal penalty, but they will be subject to ordinary income taxes.
If you will need funds over an extended period of time, you should consider a special election called an IRC Section 72(t) distribution. Such withdrawals are subject to ordinary income taxes, but avoid the 10% penalty, if they are “substantially equal periodic payments” and continue without modification for at least five years or until you turn age 59 ½.
Raising cash in a way that avoids penalties and minimizes taxes will reduce the financial impact of divorce on women.
Contact us today to learn how a Certified Divorce Financial Analyst® can help guide you and answer your financial questions before, during, and post-divorce.
One of your most valuable resources in retirement will be Social Security. These benefits are unique, because they are guaranteed by the federal government, they are paid for as long as you live and they are increased annually for inflation. There is no other program like it. So, it is important that you understand the Social Security benefits to which you are entitled as you exit your marriage.
If you have worked for at least 40 quarters, you will be eligible for Social Security benefits on your own. If you have been married for at last 10 years and you remain unmarried after your divorce, you will be eligible, beginning at age 62, for benefits based on your ex-spouse’s record.
Once you apply for benefits, you will receive benefits based on your record. If the benefit you would receive based on your ex-spouse’s record is higher, you will receive an additional amount, so that the combination of the benefits equals the higher amount. If your ex-spouse dies before you, you will receive the higher of your and your ex’s Social Security benefit.
If you were born before January 2, 1954 and you have reached your full retirement age (FRA), you can choose to receive only the divorced spouse benefit and delay receiving your own benefit up to age 70. If you were born after that date, you do not have that option.
Keep in mind that if you are younger than your full retirement age and you continue to work after starting your Social Security benefits, there are earnings limits that may result in a reduction of your benefits.
If you have not yet established online access to your record with Social Security, you should. Make sure your record is accurate and start exploring your benefits. Social Security benefits can dampen the financial impact of divorce on women.
The Road Ahead
You may be wondering how you will be able to live comfortably in retirement after going through a divorce. You will probably need to make adjustments such as working longer/retiring later, saving more, and spending less.
Consider working with a CERTIFIED FINANCIAL PLANNER™ (CFP®) who is also a Certified Divorce Financial Analyst (CDFA®) for financial planning advice and a Certified Public Account (CPA) for tax advice