Divorce: Minimizing the financial damage
“It’s hard to break your marriage vows and still leave your retirement savings intact,” said Annie Nova in CNBC.com. Roughly 40 percent of all marriages end in divorce. The formal conclusion of a marriage demands legal fees be subtracted, assets and accounts halved. And couples often find themselves starting from scratch financially as two-income households “shrivel down to one.” The financial impact is significant—the average net worth (not including housing) for families unscathed by divorce is $132,000, compared with $101,000 for those who have endured one. Ending your marriage “can be almost as destructive to your retirement savings as the Great Recession was,” according to the Center for Retirement Research at Boston College.
Divorce is becoming even harder for those earning less than their former partners, said Leanne Italie in the Associated Press. Changes in the tax law mean that, starting next year, ex-spouses who pay alimony—generally higher-earning men—will no longer be able to deduct that on their tax forms. After seeing that 600,000 taxpayers took a deduction for paying alimony but only 414,000 reported receiving any, the IRS has cracked down. The new tax rules make alimony more expensive and have left divorce lawyers seething. “Stay-at-home moms and dads are really being hurt,” says one. With less chance of alimony, the best way for divorced women to leave a marriage and “secure a successful retirement,” said Suzanne McGee in Money.com, is to leave with the keys to the house. Divorced women still tend to end up better off financially than those who’ve never been married, and the house is the central difference. Just consider whether you should keep the marital home or trade it in for one that costs less to keep up, so you don’t wind up “house-rich but cash-poor.”
And you can’t retire with nothing but the house, said Beth Pinsker in Reuters.com. “Giving up retirement assets can be one of the biggest psychological blows in a divorce.” No matter how you dice it, “each spouse ends up with less” than they were “expecting to carry them through the rest of their lives together.” Adding to the pain are restrictions around contributions. Even if you lose, say, $250,000 from your 401(k) in your divorce agreement, you can invest only up to $18,500 per year—or $24,500 if you’re over 50. You will need to develop a “saving psychology” to get yourself back on your feet. Once you’ve maxed out your current contributions, “auto-deduct another couple of thousand dollars and stash that money in a taxable investment account” and continue building from there.