Giving up retirement assets can be one of the biggest psychological blows in a divorce. The other assets that couples typically divvy up, like a house and cash, are usually in joint accounts.
When splitting pensions, IRAs and 401(k)s, which all require legal documents, couples can choose a straight 50-50 split or a more creative swap. When incomes and savings are equal, sometimes both parties just walk away with their own pots. No matter what, each spouse ends up with less money than they had been expecting to carry them through the rest of their lives together.
Overall in the United States, divorced households have about 30 percent less net worth than non-divorced households, and have a 7 percentage point higher risk of not having enough money to last through retirement, according to a new study from the Center for Retirement Research at Boston College.
At first, "there's a lot of crying," says Michelle Buonincontri, a certified financial planner and certified divorce financial analyst based in Scottsdale, Arizona.
Rebuilding your retirement nest egg after a divorce is complicated because qualified retirement plans have contribution restrictions.
You might lose $250,000 from your 401(k) in a divorce agreement, but you can only invest $18,500 per year, or $24,500 if you are over 50. And IRAs and Roths are limited to contributions of $5,500 per year, with restrictions related to age and income. Pensions are walled off completely.
TIME ON YOUR SIDE
A financial strategy as well as a bit of saving psychology will help you get back on your feet.
What kept Nolte going is that he knew time was on his side after his first divorce, even though he had to cash in his whole retirement IRA for small business owners to maintain two households, pay lawyers and fund the divorce settlement.
"At 40, you still have the benefit of compounding," said Nolte, who is now 61 and based near Orlando, Florida.
Financial planner Rose Swanger had a high-income client who found himself in a similar situation - he had to give up half of a seven-figure 401(k) balance in a divorce and was very down about it. Swanger suggested he continue to max out his current contributions in his retirement plan but also auto-deduct another couple of thousand of dollars and stash that money in a taxable investment account.
"That helps build up an emergency fund and set aside money for savings," Swanger said.
More than five years later, her client now has more than $250,000 in his 401(k), and more than $100,000 in his taxable account.
The situation for the spouse on the receiving end of the retirement accounts, who might have been a stay-at-home parent during the marriage or just earned less, also has challenges. Things get even more complicated when the receiving spouse is past retirement age because you cannot contribute to accounts like 401(k)s and IRAs unless you have earned income, and Social Security does not count.
One of Deirdre Prescott's clients got a $500,000 chunk of her ex-husband's IRA but she is now 62 and no longer working as a teacher. Prescott is working with her to bridge the gap between when her client's alimony runs out in two years and when she taps Social Security. (Delaying retirement benefits until age 70 greatly increases the amount you get each month.)
Prescott's client plans to live off other assets and some modest free-lance income. The key part of the strategy is to take advantage of her low tax bracket.
She will convert as much of that traditional pre-tax IRA into a Roth IRA, which allows contributions to grow tax-free. She will have to pay income taxes on the amount she transfers, but the account will then grow tax free, and she will not be subject to required minimum distributions at 70 1/2 like she would be with an IRA.
"She came in completely panicked but if she continues to live modestly and puts off taking Social Security, she should be OK," Prescott said.
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