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Don’t let divorce derail your retirement

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Divorce isn’t just emotionally wrenching, it can be financially disastrous for both husband and wife.

And in marriages where one spouse has worked and the other hasn’t, the ramifications are steeper, especially in regard to retirement savings.

“It’s very different for a dual wage-earning couple versus a couple with a single wage-earner,” says Lili Vasileff, a Certified Financial Planner and president of the Association of Divorce Financial Planners. “There’s a huge disparity. The person who’s been working can generate savings and have the possibility of having them matched by an employer. The nonworking spouse needs liquidity. They’re not thinking down the road.”

The upshot: It’s not uncommon for wives to get the house while husbands keep retirement benefits. But that division of assets can prove to be a big problem, says Amy Whitlatch, a Certified Divorce Financial Analyst in Cincinnati. “Will you have the cash flow to stay in the house after you divorce? It’s often much better to sell the house and divide the proceeds and retirement funds so both parties walk away with a nest egg and cash,” she says.

Facing divorce? Protect your assets.

8 ways to protect your assets
  1. Establish your own credit and close joint accounts.
  2. Beware of mutual debt.
  3. Hire someone who’s smart about money.
  4. Don’t raid retirement funds to pay for a divorce.
  5. Gather all financial and retirement documents.
  6. Know how divorce affects Social Security benefits.
  7. Get smart about retirement plans.
  8. Protect your survivor benefits.

1. Establish your own credit and close joint accounts.

Once you’re divorced you’ll no longer be dependent on a spouse for your financial well-being, so your personal credit history is more important than ever. If you don’t have one, get a credit card in your name. Open a personal savings account. The longer you can establish a personal track record of good money habits, the more easily you’ll be able to rent or buy a new home, get loans, even get a job. What’s more, having a solid financial record can help offset any damage done to your credit history by a spouse who ran up debts.

Both spouses are responsible for shared debt, so the last thing you want is to leave something like a credit card account open if you’re not the only one controlling how it’s used. For that reason, you’ll want to close them as early as possible. If you’re unable to pay off the balance, the card can’t be closed but you can request that it be made inactive. Once you file for divorce, you can’t change bank accounts without the permission of your spouse or his or her attorney, though you can withdraw money. Once such accounts are closed, be sure to obtain final statements for your records. 

2. Beware of mutual debt.

Check your credit report. It will clearly spell out lingering debts that you may not be aware of. That’s important. Even if you blame your spouse for running up bills, you’ll still be partly responsible for paying them off.

That said, debt can be used “as a bargaining tool for other benefits,” says Cindy Hounsell, executive director of the Women’s Institute for a Secure Retirement. “If someone went skiing with buddies in Aspen and spent $15,000, you can start negotiating so you don’t assume half of that.”

On the other hand, if you’ve used a personal credit card to pay for essentials like the kids’ tuition or groceries, you can negotiate for your spouse to assume shared responsibility.

3. Hire someone who’s smart about money.

Having a legal whiz on your team is great. But you’ll need help from someone who has in-depth financial expertise, too. Here’s why: Before retirement assets can be split, they need to be valued. And that’s frequently not an easy thing to do. How do you put a price on things like stock options that aren’t vested? What are the real costs of a divorce agreement?

A Certified Divorce Financial Analyst can help. They specialize in assessing long-term financial impacts of divorce settlements and have in-depth knowledge of how assets such as retirement plans are structured and what must be done to properly value and divide them.

An attorney, financial planner or court mediator may have CDFA credentials. If your lawyer doesn’t have this extra training, it may be worth the expense to hire another financial pro to help analyze the financial impact of your settlement before anyone signs on the dotted line. To find one near you, check the Institute for Divorce Financial Analysts’ Web site.

If you do opt to open an IRA, make sure you follow through and fund it. Arrange to have deposits automatically made into the plan each month. You’ll be less likely to miss the money coming out of your day-to-day budget if you put savings on autopilot.

“When you take time off, you’re putting all your eggs in somebody’s basket, so you need to be sure there will be money there when you need it,” says Hounsell. “If you’re going to make the decision to stay home, and your spouse isn’t willing to fund a retirement plan for you, maybe you need to rethink it.”

4. Don’t raid retirement funds to pay for a divorce.

Finding an attorney is one thing. Paying for their expertise is another, and many individuals find they’ve got to really stretch to cover the tab. A retirement fund is a tempting source of cash. But it’s one that pros repeatedly caution against using.

“Borrow the money instead. Using retirement money is the worst and you never get it back. People think they will, but they never do,” says Hounsell.

If you cash out of a retirement fund like a 401(k) or IRA, you’ll owe a 10 percent early withdrawal penalty if you’re younger than 59½, plus income taxes. Then there’s the opportunity cost when you remove money that is compounding on a tax-deferred or tax-free basis.

While it’s never good to run up debt, this may be one occasion that it’s unavoidable, says Vasileff.

“Borrow from friends. Borrow from family. I had a client who sold her engagement rings, ” she says. “But if you don’t have assets or other options, you’ll need to incur debt. With the 401(k) penalty and tax hit, it’s better to use a credit card.”

5. Gather all financial and retirement documents.

You can help keep costs in check by being prepared before you see an attorney. That means gathering up any records of investments, assets, retirement funds and the like. You can start with tax returns. They’ll list such assets as bank accounts, dividends from investments in a brokerage account or IRAs.

Employer-sponsored retirement accounts can be tougher to identify because they’re generally not listed on tax statements. If you have no idea what your spouse has been entitled to, you may need to do some digging. Log on to his or her employer Web sites to find out more about benefits offered. Federal law also requires public companies to supply workers with a personal statement of benefits, so try to track those down. Go through your files at home, and don’t forget about previous jobs, either.

“One of the most frequently missed assets is a pension from a prior employer,” says Whitlatch. “I ask my clients, ‘Where did he work before? How long? Was there a pension?'”

6. Understand how divorce will affect your Social Security benefits.

If you’ve been married for at least 10 years you may be entitled to half of your spouse’s Social Security benefits. But like anything else, there’s some fine print.

If you’ve earned Social Security benefits of your own, you can claim the greater of either your personal benefits or half of your former spouse’s, but you can’t claim both. To get an estimate of those benefits, go online to

Remarrying also will disqualify you from claiming your ex-spouse’s Social Security. On the other hand, if he or she remarries, you’d still be able to claim your share.

7. Get smart about retirement plans.

Retirement assets, whether a pension, annuity, stock options, a 401(k) or other benefits that amass during the course of a marriage, are considered marital property. Does that mean they’ll automatically be split 50-50? Not necessarily.

“Equitable does not mean equal,” says Vasileff. “If you have people who are close to retirement, and they’ve been in a long-term marriage, it’s more than likely the assets will be shared equally. But if a couple is in their early 40s with little kids and a short-term marriage, it depends.”

That’s where negotiations, and careful documentation, come into play.

Qualified retirement plans, which include things like a 403(b), 457, 401(k) or profit-sharing plan, are divided using what’s called a qualified domestic relations order, or QDRO. As their name implies, these documents specifically instruct retirement plan administrators how to distribute benefits to a spouse who hasn’t participated in the plan but is claiming his or her share in a divorce. It’s up to a lawyer representing the spouse who makes the claim to prepare the order properly.

8. Protect your survivor benefits.

One thing you’ll need in a QDRO are so-called survivor benefits. These ensure you continue receiving benefits after your spouse dies. Just because you get benefits when your former husband or wife is alive doesn’t mean you’ll continue receiving them when they die. You’ve got to make sure your lawyer has specifically asked for them. In come cases, attorneys have failed to do so and an individual who was counting on benefits has watched them vanish.

“It’s one of the worst scenarios possible,” says Hounsell.

Another way to safeguard survivor benefits is to make sure the QDRO is drafted and accepted by the retirement plan before the divorce is finalized. If something happens to your ex-spouse in the time that the divorce goes through and the QDRO gets approved by his or employer, you’ll wind up with nothing.

In a perfect world, papers don’t get lost and everything runs smoothly. But life isn’t seamless.

If you’re claiming benefits from your former spouse, make sure the QDRO was received and accepted by his or her retirement plan administrator. Has that survivor benefit been included? Your attorney has the responsibility to follow up, but if you’re smart, you’ll also make sure the job has been done right.

“Don’t assume your attorney is going to know what is in your own best interests unless you tell them,” says Vasileff.

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