DIVORCE AND RETIREMENT: SMALL MISTAKES NOW CAN COST YOU LATER ON
Divorce happens – and unfortunately, rather often. Current statistics indicate that roughly one third of marriages fail to go the distance. Retirement may not seem high on the list of pressing issues when you’re in the midst of a divorce, but neglecting it could have a significant negative impact down the road.
Most retirement accounts are structured as long-term investments, requiring regular contributions that are added over time. Those payments have a way of accumulating into sizable chunks of money. In addition, retirement assets may not appear in your joint bank statements and can be more easily forgotten – or hidden.
When the time comes for you to retire, you’ll be glad that you acted cautiously during an emotional period in your life. Here are a few ways to avoid common mistakes.
#1 Know where all of your assets are. Gather your family’s financial information in one place so you can view tax returns, 401(k) records, IRA’s, annuities, pensions, whole life insurance cash value assets, and cost assessments of property such as homes, cars, artwork, items in safety deposit boxes, jewelry, and furniture. Don’t forget the fair value of a business owned in common. Assemble bills, debts, and note any ongoing costs. You’ll need proof of ownership to access assets in the future, so make certain that you’re named in writing as an owner, recipient, or beneficiary – whichever applies. If you suspect that your spouse may have hidden or forgotten some joint assets, enlist experienced help to find them. You may be able to find legal assistance at low cost (or even free of charge) by looking for a Legal Aid Society office in your area.
#2 Talk to financial experts first. Even if you and your soon to be ex are getting along and the divorce is mutual, your financial interests may not be the same – especially if there has been a big difference in earnings. Many experts advise people to get financial advice and learn the issues well before taking legal action. Financial representatives may be able to help explain insurance policies and retirement accounts – often for free – whereas divorce lawyers typically charge $350 an hour. Whether you decide to go with divorce court or arbitration, your representation should know divorce laws thoroughly. They should also be expert in retirement accounts, pensions, annuities, insurance policies, workplace benefits plans, and in particular, the effect of taxes on these types of accounts and plans.
#3 Understand your eligibility for social security and retirement plans. Before you sign the divorce papers, know your rights. For instance, after 10 years of marriage, you may qualify for social security payments based upon your spouse’s higher income (with some stipulations), meaning potentially more income each month.
#4 Learn about tax effects. Receiving a lump sum from a divorce settlement may count as income and therefore taxable at a high rate, depending upon your tax bracket. Almost all retirement savings plans are given tax advantages by the US government to help build your savings over time. However, those taxes will eventually have to be paid. Make sure that the financial advice you receive is taking taxation into account, particularly when it comes to alimony, income, capital gains, rollovers, etc. The more money available to feed into retirement investments now, the more that money can grow.
#5 Get it right the first time. It can be expensive, although not impossible, to get a “do-over” if you don’t like your divorce judgement. So it’s by far preferable to understand the assets and factors before you sign the papers. Ideally, choose an arbitrator/lawyer who is familiar with the details of workplace retirement accounts such as “qualified-distribution” plans—the features can be complicated. An expert can make sure the terms of company plans get modified ahead of time to fit in with your own retirement needs. Important: have a clause inserted into your divorce decree that says any assets discovered after the settlement will be divided.
#6 Take a closer look at insurance. If you depend on future income from your ex-spouse, as in child support or alimony payments, it’s important to have insurance policies in place to ensure that income. The same applies if they depend on this support from you. Should you or your spouse suffer a major sickness or become injured, most workplace disability insurance won’t pay income or bonuses in full unless a supplemental policy is set up beforehand. If either of you have life insurance, depending upon the type, it’s important to know that whole life insurance policies can have cash value, and this should be part of the divorce settlement. And, if you or your spouse are covered by term life insurance that would be used to cover support payments, make sure the payments are up to date. Your financial representative can help you identify which insurance you hold, in case you need to contact them. When you’re trying to put aside enough to feed your retirement accounts, all assets are important.
#7 Pare down costs so you can continue to fund retirement. Post-divorce lifestyles often bring changes. You can find yourself “house-rich and cash-poor”– paying the mortgage on just one income, along with the taxes, upkeep, property insurance, and other expenses. If you’re going to have to sell your house, start early. By curbing costs and continuing your retirement savings, you’re giving the balance enough time to build over time.
Your divorce may be inevitable, but by remaining aware that one day you hope to retire, you can lessen the financial impact. With time you’ll move on from the divorce, and with planning, you’ll achieve the retirement you’ve envisioned.
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