Divorce is almost always complicated, but it's especially complicated when you are nearing retirement.
It's not just the rapid changes to the retirement you thought you would have that you must contend with. There can be financially disastrous consequences that can challenge your retirement plans as well.
If you're heading toward a divorce on the eve of retirement, here are some of the most important considerations to bring to your financial advisor and divorce lawyer.
Preparing your finances for a later-in-life divorce
They call it "gray divorce," and it's on the rise. Between 1990 and 2015, the divorce rate for adults aged 50 and over doubled. Baby boomers are changing divorce trends, and later-in-life separations are becoming increasingly common.
Mitigate the negative financial aspects of divorcing close to retirement by asking yourself these questions in advance. If you're working closely with a divorce attorney or financial planner, these are important questions to make sure they're helping you consider.
1. Can I afford the family home?
Maybe you always dreamed of growing old in the home where you raised your family, or perhaps you can't bear to part with the memories you created there.
If you do get the family home in the divorce, crunch the numbers to make sure it's financially responsible to keep it. Remember, you'll have to pay for maintenance, property taxes, insurance and whatever is left on the mortgage by yourself.
If you're unsure about whether this is an expense you can afford, it might make sense to hire a financial advisor. These professionals typically charge an hourly fee, a flat fee or a fee based on your assets (between 0.59% to 1.18% as of May 2020).
An advisor can help you take a data-based approach to assessing whether your home is the best investment for you at this point in your life, given your finances and the housing market in your area.
Given they are generally locally based, working with an advisor can provide insight specifically to your situation especially as housing markets can vary significantly from Dallas to New York.
2. Is there joint debt that I'm not aware of?
There are a number of ways you could be liable for debt that your partner has accumulated. The most common would be any joint accounts or credit cards, or any debt that you have cosigned for.
Even if you were unaware of these debts or forgot about them over the course of your marriage, you'll still be responsible for them upon divorce. That's why you should immediately get a copy of your credit report to review all of the debt in your name.
You can request your free copy of your credit report once a year from the three credit reporting agencies. Actually, until April 2022 you can monitor your credit reports weekly for free. You should immediately fix any mistakes you find in your report before taking steps to repay any debt of which you were unaware.
Also, if you live in a community property state, you could be liable for some of your partner's debt. IRS Publication 555 contains the details of how community property works. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
3. Do I need a Qualified Domestic Relations Order (QDRO)?
A Qualified Domestic Relations Order (QDRO) is a legally binding document that specifies a spouse's right to a preset amount of their partner's retirement plan during a divorce. Without a QDRO, the retirement account holder could be liable for taxes on the transferred amount of the retirement assets if they are withdrawn before age 59.5.
With a QDRO, an individual may be able to roll over all or some of the funds tax-free. IRS Publication 504 covers QDROs. If your financial advisor or divorce lawyer has not addressed this strategy with you yet, bring this up in your next meeting.
A QDRO could potentially save you thousands in taxes on an early disbursement, which could significantly impact your retirement strategy.
4. How should I start investing now?
Divorce can be a major blow to your finances right before retirement, and it could change your investment strategy as well as your risk tolerance. You'll want to reassess your investments in light of your current financial situation and your timeline for retirement (not to mention the lifestyle you plan to lead in retirement).
There's a chance that all your retirement plans have changed. For example, if you planned to operate an income property in retirement and are now losing that property in the divorce, you'll need a new plan.
Even though your plans might be changing, not all is lost. Review the best investment strategy for you now. Is it the stock market? You could modestly expect to earn 6% annually with conservatively invested funds. Is it real estate? A small business? Even though you might be restarting, the good news is that you do have options.
Divorcing is never easy, but don't let the fear of your finances keep you from making the best choices for you and your family. Even though a divorce can have a major impact on your retirement, asking the right questions early can help you create a plan to overcome any challenges and tailor a retirement lifestyle that fits your goals.
Jolene Latimer has her master's in Specialized Journalism from the University of Southern California. She writes about personal finance, marketing and sports.
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