Divorce & Retirement: 6 Costly Common Mistakes

Goldberg Jones Divorce, Finances Leave a Comment

Increasingly, we hear talk about so-called gray divorce. This term refers to couples who divorce later in life, often after lengthy marriages. Ending a marriage has drastic financial implications no matter the age of the spouses. But couples approaching retirement face a number of unique potential pitfalls and challenges. Here are some costly common mistakes to avoid in divorce as you near retirement.

1. Not Knowing What You’re Entitled To

Over the course of a marriage, spouses’ lives intertwine. The longer the marriage, the more entangled every facet becomes. As time passes by, you become eligible for certain retirement benefits based on your spouse.

For unions lasting over ten years, you may be eligible to receive Social Security based on your ex’s work history. If your spouse served in the military, this entitles you to collect a portion of that. A number of such potential allowances exist, but if you’re not aware of them, you may leave money on the table.

2. Not Considering Ex’s Social Security Eligibility After Divorce

Being married for a minimum of ten years entitles you to half of your spouse’s Social Security benefits after divorce. That’s great, but, as with most things involving the government, it’s not that simple. You must be older than 62, and you must currently be unmarried.

Whether or not your ex remarries is beside the point. Your ex also must be eligible for Social Security in the first place. If you hope to collect based on your ex’s work history, any benefit must be larger than your own. Simply put, you get one or the other, not both. What you get also depends on when you take them—if you wait until full retirement age, you get more.

3.Choosing The House Over Other Assets

In many divorces, a shared home is the biggest asset to divide. It makes sense, this is, for most of us, the most expensive, significant thing we’ll ever buy. Also, it’s where we’ve lived for years, it’s our home, so, many people fight to keep the house.

However, this may not always be the best financial choice. Houses cost money to maintain and are often difficult to liquidate depending on your market. A smarter move may be to take retirement funds and let your spouse keep the house. Another option is to sell the house and split the proceeds. That’s money you can use to bolster your retirement funds.

4. Ignoring Tax Implications Of Retirement Benefits

Ignore the tax implications of retirement benefits divided in divorce at your own peril. You may think you’re getting one amount but wind up with something very different. It’s important to know the differences between things like a traditional 401(k) or IRA versus a Roth IRA or Roth 401(k). In this instance, one is taxable, one is not.

When you withdraw money from a standard IRA or 401(k), the IRS taxes you when you remove money. So, if you have a $100,000 401(k), you wind up with substantially less.

On the other hand, with a Roth IRA, you pay the taxes when the money is deposited into the account, not when you make a withdrawal. The money was taxed ahead of time. On paper, a $200,000 IRA and a $200,000 Roth IRA may look the same, but in practice, they’re quite different. Knowing such details may give you a leg up.

5. Raiding Retirement Savings

It’s often tempting to dip into retirement savings early. After all, it looks like this big chunk of cash just sitting there, waiting to be spent. This is especially enticing if you rack up significant expenses or lose income during the divorce process.

But remember, every time you make a withdrawal, you eat away at your retirement savings. You need that money to live on for however long you plan to stick around, which is hopefully quite a while. Not to mention, you face taxes, fees, and penalties for early withdrawals. It might be worth it in some situations, but it isn’t a decision to make lightly.

6. Not Being Aware Of Mutual Debt

Washington is a community property state, which has a substantial impact on divorce settlements. Under these statutes, the court views all assets acquired during a marriage as belonging equally to both spouses, and it subsequently divides property as such. So, too, is debt.

This is an issue in marriages of all lengths, but if your spouse has been building debt for years without your knowledge, you could be in for a nasty surprise. If you’re close to retirement, you don’t want to start off a new phase of your life in a deep hole. It’s yet another reminder to keep a close eye on the family finances, all of them.

Like most situations involving money and ending a marriage, things get complicated when it comes to divorce and retirement. There’s a lot to consider and many moving parts, and these are just a few. 

Leave a Reply

Your email address will not be published. Required fields are marked *