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The vast majority of divorcing women are much younger than their so-called “Golden Years”, and yet it’s essential that every woman address the issue of retirement during divorce negotiations.
Because the decisions you make during your divorce can have a serious impact on your financial well-being –not just in the short-term, but in the long-term, as well. We all know that life expectancy for women is higher than ever. It now stands at 80.3 years, and that means any divorce settlement you achieve is likely going to have an impact on your life for decades yet to come.
Someone once said that marriage is all about love, and divorce is all about money. They were right, and there’s no getting around these two simple truths:
1. When you’re in the throes of a break-up, you must Think Financially, Not Emotionally®, and
2. You must negotiate a divorce settlement agreement that financially protects you now, and well into your retirement years.
As a fundamental part of your divorce team, a qualified divorce financial planner can help ensure that you achieve financial stability today, even while you plan thoughtfully for the years ahead. (Who should be part of your divorce team? )
Here are five specific issues that need to be addressed:
When you were married, you and your husband planned for retirement together. Perhaps you even put all of your funds into your husband’s work retirement account because you thought you would still be married when you retired. Obviously, divorce changes every one of those plans and requires the careful scrutiny of all retirement accounts. Retirement plans such as pension plans, 401(k) plans, and Individual Retirement Accounts (IRAs) are typically treated as marital property. (What is marital property?) However, the process by which they are divided depends upon a number of factors. For example, the court must adhere to federal guidelines when dividing funds in a 401(k) plan, but state laws dictate how IRAs are divided. As you can see, it’s critical that your divorce settlement agreement clearly spells out how the assets are split and how those funds will be transferred. There are even more thorny issues to contend with when you need to divide a pension plan.
Qualified domestic relations order (QDRO)
If your divorce settlement agreement states that you will divide a pension and/or 401(k) plan, a court must order a qualified domestic relations order, commonly abbreviated as QDRO. A QDRO will instruct your husband’s plan administrator on how to pay you your share of the plan benefits. A QDRO allows the funds in a retirement account to be separated and withdrawn without penalty and deposited into your own retirement account (typically an IRA). Many women -and some attorneys, too! -often make the mistake of assuming that their divorce settlement agreement will fully protect their rights to their portion of their husband’s retirement account. This is usually not the case, and that’s why it’s critically important to use a properly prepared QDRO. (Because QDROs are so complicated to prepare, most attorneys outsource that work to a QDRO specialist. Make sure that this does not fall through the cracks and that the QDRO is issued as close to the time of divorce as possible. Otherwise, under certain circumstances, all rights to that retirement money can be lost.)
During divorce, most women review their options for health insurance, but many neglect to consider other types of insurance, such as life, property/casualty and disability. Once you are single, those types of insurance become more important than ever, so be sure to include them in your divorce planning. In addition, if you will be receiving child support and/or alimony, you will want an insurance policy that protects you financially in the event something happens to your ex-husband. This is much easier to accomplish during divorce negotiations, rather than after a settlement is finalized. Be sure to work with a divorce financial planner to go through all the options available to you.
Retirement and estate planning
Following your divorce, you’ll need to achieve financial stability in the short-term, while taking the right steps to plan for financial security into your retirement years. For instance, it’s a good idea to create a budget that will allow you to maintain your lifestyle, pay off debt, and increase your savings. In some cases, however, the divorce settlement doesn’t provide enough income to pay your expenses, and you will need to start immediately liquidating assets to maintain your lifestyle. A divorce financial planner can help you determine how long your assets will last and which adjustments are necessary for continued financial stability. Along those same lines, divorce underscores the need for careful estate planning – especially if you have children. As remarkable as it sounds, in some cases, when a woman has failed to plan and then dies, an ex-husband might gain control of her assets.
Remember to change your beneficiary designations on all of your accounts. If you don’t, your ex-husband could be entitled to those funds!
Many people start their post-divorce lives not fully understanding that their settlement must last for many years –and maybe even for the rest of their lives. Working with a professional divorce financial planner can help you transition to the next phase of your life by prioritizing financial goals and developing realistic financial plans for your future.
Jeffrey A. Landers, CDFA™ is a Divorce Financial Strategist™ and the founder of Bedrock Divorce Advisors, LLC (http://www.BedrockDivorce.com), a divorce financial strategy firm that exclusively works with women, who are going through, or might be going through, a financially complicated divorce. He also advises women business owners on what steps they can take now to “divorce-proof” their business in the event of a future divorce. He can be reached at Landers@BedrockDivorce.com.