Ask a roomful of women to talk about their dreams for retirement, and many will mention vacation homes, travel, hobbies, volunteer work, going back to school and lots of rest and relaxation.
However, as a recent article at The Wall Street Journal points out, divorcing later in life can cause all these retirement plans to unravel.
Even though divorcing later in life certainly isn’t something new, it does appear to be growing more and more widespread. Now popularly referred to as “grey divorce,” researchers attribute this increasingly common phenomenon to a number of different factors, including the steady rise in life expectancy, women’s growing financial independence and the simple fact that divorce is more socially acceptable than ever before.
But, how do women who divorce later in life fare financially? Is it possible to survive grey divorce with your finances intact?
That depends. Here’s my advice to help smooth the ride for women who are going through, or may be contemplating, divorce later in life:
Take protective measures while you’re married. As I have mentioned several times before, when it comes to divorce, the best defense is a good offense. Even happily married women need to preserve a measure of financial independence, and it’s essential that you keep a separate bank account, establish credit in your own name, maintain access to all marital money, divorce-proof your business, etc.
Be an active participant in your family finances and you’ll establish the know-how and confidence to better succeed as a single woman.
Divide retirement funds and pension plans with care. Divorcerequires the careful scrutiny of all retirement accounts. For example, retirement plans such as pension plans, 401(k) plans, and Individual Retirement Accounts (IRAs) are typically treated as marital property. (See this post if you’re wondering, “What is marital property?”)
However, the process by which they are divided depends upon a number of factors. For instance, the courts use federal (ERISA) guidelines when dividing funds in a 401(k) plan, but state laws have jurisdiction over IRAs. Likewise, there are even more thorny issues to contend with when a pension plan needs to be divided, and there are numerous differences between federal, state, military and private pensions.
Make sure you fully understand your share of these assets (and how those funds will be transferred), and that all the details are clearly spelled out in your divorce settlement agreement and in a QDRO (as described below).
Use a properly prepared Qualified Domestic Relations Order (QDRO). 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. However, this is usually not the case.
If your divorce settlement agreement states that you will divide pension, profit sharing and/or 401(k) plans, a court, in most cases, must order a Qualified Domestic Relations Order (QDRO). The QDRO instructs your husband’s plan administrator on how to pay you your share of the plan benefits, and it allows the funds in a retirement account to be separated and withdrawn without penalty so they can be deposited into your own retirement account (typically an IRA).
Important note: Some retirement plans, such as certain municipal retirement plans, cannot be divided by a QDRO and other plans do not allow for any upfront, lump sum payments, which means you may need to wait years or decades before receiving monthly payments. You absolutely need to know this before agreeing to any divorce settlement offer.