How to Retool Your Retirement Plan After Divorce
Shelby J. Smith-Beckert discusses with U.S. News and World Report how to retool your retirement plan after a divorce. To find out more on this topic, read the full article here: https://money.usnews.com/money/retirement/baby-boomers/articles/how-to-retool-your-retirement-plan-after-divorce
WHEN IT COMES TO retirement, divorce can be disruptive at best and devastating at worst. This is especially true of divorce after age 50. Spouses are at risk of losing a significant amount of their retirement savings and may have relatively few years left to replenish their accounts.
“Both spouses have to adjust, but the spouse with the lower income has to adjust more,” says Nicholas Yrizarry, president and CEO of investment firm Align Wealth Advisors in Laguna Hills, California. He recommends divorcees move forward by stepping back, regrouping, restrategizing and re-implementing their retirement plans.
Take the following steps to retool your retirement plan after getting a divorce:
- Ensure you have a proper Qualified Domestic Relations Order.
- Understand your spousal benefits for Social Security.
- Create an inventory of investments and assets.
- Update your retirement plan.
- Start contributing to your own savings.
- Adjust your lifestyle as needed.
Ensure You Have a Proper Qualified Domestic Relations Order
If your spouse has an employer-sponsored retirement plan, nothing may be quite as important as obtaining a Qualified Domestic Relations Order, otherwise known as a QDRO.
“QDROs are orders that qualified plans require in order to pay out nonparticipants,” explains Dana M. Stutman, a founding partner of the matrimonial law firm Stutman Stutman & Lichtenstein, LLP in New York City. In short, the only way to get a payout from a 401(k), pension or similar plan if you’re not the worker is if you have a QDRO.
However, QDROs need to be written in a certain way to be accepted. “The (retirement) plan administrator may have very specific rules,” Stutman says. Because of the complexities of these orders, they can be time-consuming and expensive for an attorney to draft. A more cost-effective option may be to employ an actuary who specializes in writing QDROs, Stutman suggests.
The nonparticipating spouse can take money received from a QDRO and roll it into his or her own IRA or other retirement fund. Before taking that step, consider whether you will need any of the money for another purpose. In most cases, people are assessed a 10% penalty if they withdraw money from a tax-favored retirement plan prior to age 59 ½. However, you can take proceeds from a QDRO without a penalty, says Shelby J. Smith-Beckert, senior financial consultant with Orlando-based International Assets Advisory. You’ll need to make the withdrawal prior to rolling the money into another retirement account though.
Understand Your Spousal Benefits for Social Security
A divorce doesn’t necessarily mean you lose out on Social Security spousal benefits. So long as you were married for 10 years and have not gotten remarried, you are entitled to receive retirement benefits from your ex-spouse’s Social Security record.
If you start receiving benefits at your full retirement age, you’ll receive an amount equal to one half your ex-spouse’s full retirement benefits. If you claim benefits early at age 62, you’ll get a reduced amount. However, your ex-spouse will need to be at least 62 as well for you to begin claiming benefits, and unless he or she is already receiving Social Security benefits, you’ll need to wait two years after your divorce to begin payments. Claiming these benefits in no way affects your ex-spouse’s retirement benefits or that of anyone he or she marries after you.
Create an Inventory of Investments and Assets
Now that you understand what, if any, retirement funds you’ll receive from your ex-spouse, it’s time to take a complete inventory of your assets. While an inventory may be provided at the end of the divorce, it’s important to review and verify this information, says Bryan Bibbo, an accredited investment fiduciary with advisory firm The JL Smith Group in Avon, Ohio.
“Maybe your ex-spouse was the one handling the finances,” Bibbo says. Take this time to familiarize yourself with your accounts and their tax implications. If you’re confused, seek a financial professional for guidance. “Usually, when I’m dealing with divorced individuals, I’m doing a lot of education,” Bibbo says. For instance, people may not understand how 401(k) payouts are taxed and whether it makes sense to request a lump sum or periodic payments from a retirement plan.
Update Your Retirement Plan
A retirement plan for a married couple should take into account the ages, goals and incomes of two people. When you become single, you need to consider whether the plan meets your needs. You may have to adjust your portfolio to better reflect your expected retirement date and personal risk tolerance.
At the same time, update the beneficiaries on all your financial accounts. “The beneficiary designation takes precedence over your will,” Smith-Beckert says. Unless you want your ex-spouse to receive your money, make sure his or her name is removed from all retirement funds, life insurance policies and other accounts.
Start Contributing to Your Own Savings
If you aren’t already, now is the time to budget money for your future. That means creating an emergency fund that can cover three to six months of expenses, plus setting aside an adequate amount for retirement.
“You want to have a written plan with your goals,” Bibbo says. Every situation is unique; he recommends working with a financial planner to choose the right mix of retirement accounts and other savings vehicles to meet those goals.
Adjust Your Lifestyle as Needed
Perhaps the most difficult aspect of divorce is that it often requires people to make significant life changes going forward. “They don’t realize how much divorce should impact their lifestyle,” Yrizarry says. That may mean downsizing a house, forgoing vacations or changing jobs to pay bills and save enough for retirement.
These changes can feel disheartening and overwhelming, but Yrizarry says surrounding yourself with positive people can help. Seeing changes as opportunities for improvements rather than setbacks can also make these adjustments more manageable. With the right attitude, Yrizarry says people can go through a divorce and come out of it stronger in the end.