The Big Money Mistake Divorcing Women Make
With our 22nd anniversary this week (on the Fourth of July), I’m happily betting that love will keep my husband, Cliff, and I together for many years to come. But for several of my girlfriends — who, like me, are over 50 — the past few years have been anything but happily ever after.
They’ve divorced, or are on the cusp, and things haven’t been pretty — lots of would’ve/could’ve/should’ves about splitting their shared assets. Probably the biggest mistake they’ve made in their divorce settlements: leaving money on the table from their ex’s retirement stash.
I’ll offer some advice on what they’re missing — and what other divorcing women should do to get the retirement funds they deserve — in a minute.
The Growth of Gray Divorce
As you have probably heard, gray divorce is a thing. The National Center for Family & Marriage Research says the divorce rate among adults 50 and older doubled from 1990 to 2010. And in 2010, 11% of men and 15% of women age 65 to 75 were divorced, according to a new report from the U.S. Census Bureau. (In 1960, when I was born, just 2% of men and 2% of women that age were.)
The Bravo cable TV network just launched Untying the Knot, a weekly show where lawyer/mediator Vikki Ziegler helps divorcing couples divvy up their prized possessions. I don’t expect 401(k)s and IRAs to score much screen time, but they should.
As couples consciously uncouple at older ages, retirement accounts are often significant assets. And, as un-glitzy as they may be, they’re probably worth far more to your future financial security than your memory-laden belongings.
But many people don’t realize it.
What Divorcing Couples Wish They Knew
A recent Securian Financial Group survey of 546 people who divorced after 10 years or more of marriage found that going into the divorce, 31% did not claim a share of their spouse’s retirement benefits and weren’t aware they could. One-fourth of those surveyed said that after the divorce they wish they’d have known more about how to correctly divide these benefits.
In general, any retirement assets qualifying as marital property can be divvied up in your divorce agreement. However, if a spouse enters the marriage with money already in his or her 401(k), those funds are considered separate property and aren’t included in the division of assets. (In some states, though, any increase in value during the marriage could be considered marital property.)
Most places — except a handful of community property states — use an equitable distribution approach to dividing marital property: Everything acquired during a marriage in either spouse’s name or in both spouses’ names is considered a marital asset subject to division in a settlement agreement, according to the National Endowment for Financial Education.
Who actually holds the title to property is irrelevant. Three exceptions are assets owned prior to marriage, gifts and inheritances (unless they become commingled in joint accounts).
You’ll want to work with an ace divorce attorney, of course, to hammer out your Qualified Domestic Relations Order (or QDRO) for your asset split. A QDRO is a legal document, issued by a state court or agency, theoretically to protect both of you from owing taxes when retirement funds are transferred from one to the other.
6 Tips for Divorcing Women
Now to my advice for women getting a divorce or think they might. Here are six tips to help you get what you deserve for your future retirement:
1. If you haven’t divorced yet, hire a financial planner soon. This money pro can walk you through your various options regarding Social Security and retirement plan money you may be entitled to receive. This can be a huge help when trying to determine what’s rightfully yours and to help you steer through the tax laws. Look for one with the Certified Financial Planner designation.
One of my girlfriends also hired a forensic accountant to help her find where her spouse had hidden accounts. Think this sounds excessive? Don’t be naïve. The specialist turned out to be well worth it.
2. Don’t choose taking the house over retirement assets. All my divorced friends fought to hang on to their homes. That’s not too surprising; this mistake is pretty typical.
In the Securian survey, nearly two-thirds of respondents said their home was their most valuable asset as a couple at the time of divorce. In more than half of the divorces, one spouse kept it — either through mutual agreement or by buying out the other’s half.
But the best scenario, according to experts I’ve interviewed, is to sell the home and split the proceeds. The retirement savings stockpiled by your spouse may be substantial and likely to grow in the future. But a home is probably going cost you money to maintain and its future value is less predictable.
(MORE: The Out-of-Court Dividing of Assets After a Divorce)
3. Don’t raid your ex’s retirement funds. Experts advise you roll over directly into an IRA any employer-sponsored retirement funds you receive in the settlement rather than cashing out the money.
By law, however, you’re allowed to withdraw money from your ex’s 401(k) or 403(b) plan one time without incurring the 10 percent early withdrawal tax penalty if you’re under age 59 ½. If you’re buried with legal fees, you may want to pull out a fraction of the retirement funds to pay for them.
But keep withdrawals to a minimum; you want the money in the retirement funds to continue growing tax-deferred until you truly need it down the road at retirement.
4. If your husband has a Roth IRA or Roth 401(k), go for that before his standard 401(k) or traditional IRA. With a 401(k) or traditional IRA, you’ll be taxed when you withdraw money in retirement. With a Roth IRA or Roth 401(k), however, the earnings won’t be taxed, since that plan was funded with after-tax dollars.
5. Negotiate hard for retirement assets over alimony. Alimony is taxable and it’s really a short-term plan.
6. Don’t pass up his Social Security benefit. If you’re 62 or older and were married for at least 10 years, you may be eligible to collect as much as half of your husband’s Social Security retirement or disability benefits, even if he has remarried. (If you remarry, though, you generally cannot collect Social Security benefits on your former spouse’s record unless your later marriage ends by death, divorce or annulment.)
You may also be able to receive only your ex’s Social Security benefits now and delay receiving your own until a later date, which is a great idea. Social Security benefits are increased by a certain percentage — 8% annually for those of us born after 1943 — if you delay your retirement beyond Full Retirement Age.
And for those of you who may still have a soft spot for your ex, the amount of Social Security benefits you get has no effect on the amount of benefits he or his current spouse may receive.
He doesn’t even have to know about it. Ka-Ching.
Kerry Hannon has spent more than 25 years covering personal finance for Forbes, Money, U.S. News & World Report and USA Today. Her website is kerryhannon.com. Follow her on Twitter @kerryhannon.