Christine Benz: Hi, I'm Christine Benz for Morningstar.com.
Divorce can take a devastating emotional toll, but it can also be devastating financially. Here to share some tips for managing your finances during and after divorce is Christine Fahlund, she is senior financial planner with T. Rowe Price. Chris, thank you so much for being here.
Christine Fahlund: You're welcome. It's my pleasure.
Benz: You have recently been looking at this topic of the effect of divorce on retirement planning, and I think you've come away with some really practical takeaways, because it can be devastating to a retirement plan.
Let's talk about, in a big picture sense, the impact that divorce can have on your own retirement nest egg.
Fahlund: Well, for many couples what happens is that all of their retirement assets are divided in half, and they may have a qualified domestic relations order that dictates that the 401(k) plans be split in half, IRAs may be split in half. That can be emotionally devastating, as you say. If you have been saving and saving diligently, and all of a sudden what you see on your statement is half of that amount, it's demoralizing.
Benz: So, the two of you may have been on track for retirement together, but you split it in half, and neither party maybe is on track?
Fahlund: That's right. And it's important, by the way, that as part of the divorce that you do split retirement assets in half, because they are not the same as taxable assets. They are tax-deferred; they are in tax-deferred accounts. So, you're getting a tax benefit when you split the retirement accounts in half. So it's important that that be part of what you receive as someone who is going through a divorce.
Benz: It sounds as though there might also be some implications for asset allocation, for example--that you might need to realign how you are positioned based on where you're starting out after this divorce is finalized?Read Full Transcript
Fahlund: That's exactly right. There are so many changes that are going to be happening for you. One is, you may not have the same goals that you and your ex-spouse had when you were married--that's big. You may not have the same time horizon for goals that you used to have. You may have a very different risk tolerance than your spouse had. So, you need to examine all of those things, and ... if there are any changes at all--that will definitely dictate a change in your asset allocation.
Benz: One other component of this is Social Security planning, and let's talk about the rules that relate to divorce as it pertains to Social Security.
Fahlund: I think the amazing thing is that there are a lot of individuals who are divorced out there and don't realize that they will still have access, still be eligible for, their ex-spouse's benefits once they achieve retirement age.
So in many cases they say, "Well even if I were eligible, I wouldn't go near that person again." We finally settled this, and I don't want to talk to that person ever again. You don't have to. If you need the requirements, you still are eligible for your ex-spouse's benefits.
Benz: Well, let's talk about what those requirements are, because it's important to make sure that you do meet them, because in some cases the spousal benefit will be larger than what you would be able to receive on your own, based on own earnings history.
So what criteria do you have to meet in order to be able to tap that spousal benefit?
Fahlund: The first one is that you must have been married to the individual for 10 years or more. So, if it's been a long marriage, and you are close to that 10-year timeline, then you need to hold off, maybe stay separated, and both agree this is in both our interests. It's not that one spouse gets these benefits and the other doesn't; both ex-spouses can benefit.
Benz: It won't affect the spouse's benefit, the earnings history that that's being based on; none of that will be affected?
Fahlund: No. Neither of the ex-spouses is going to be impacted. So it's all a win-win.
Let's say one of the spouses has remarried; that also is not going to impact a new spouse's benefits someday.
So, number one, you have to have been married for 10 years or more to that person.
Number two, you have to wait two years after the divorce. Once that's achieved, then you cannot remarry at all if you want to receive benefits while the other ex-spouse is alive.
Benz: So, once you remarry, your entitlement to that spousal benefit is gone?
Fahlund: It's gone.
Now, if you divorce again, it comes back. So, if you have had several spouses and now you're not married to any of them, any of them that were 10 years or longer marriages, you can start taking your pick.
So that's for while you're alive. You could both be filing based on the other's benefits, the other's work history, which is also something you can't do when you're married.
Benz: One other wrinkle here, Chris, is widow's benefits, and let's talk about the interplay with divorced couples and Social Security benefits?
Fahlund: It would be nice if somebody in the family knew that your ex-spouse had passed away, so you know you are now eligible for these benefits.
You can remarry and still be eligible for widow's benefits based on your ex-spouse's earnings. However, you must wait until you've achieved age 60 or older. So, if you found the love of your life and you're ready to [re]marry at 58, if you can hold off two extra years, it just gives you that many more choices once you do retire.
Benz: One other logistical consideration that you mentioned was the importance of making sure that you do have your ex-spouse's Social Security number, date of birth, etc., so that if indeed you do end up filing based on that person's earnings history, you don't have to track them down; you actually have this information handy?
Fahlund: It's a convenience factor, and in talking with many advisers, who have been through this Easter egg hunt, it's really valuable to acquire it, and put it all away in a safe place at the time of the divorce.
One other thing I think that’s really important to tell folks who are just going through it, is what you said: It's an emotional time.
So, you do what you have to do with the finances to manage them, but you don't make major decisions, like perhaps move your whole portfolio somewhere else or cash in everything, and do something drastically different...
Benz: Or sign up with an advisor who is going to completely upend your financial plan.
Fahlund: It's just not the time to do that. Give yourself plenty of time to go through the roller-coaster emotions. That could be a year before you then settle down and get to business again.
Benz: Well, Chris, thank you so much for sharing this guidance on retirement planning as it intersects with divorce. It's an important topic. Unfortunately, it's something that a lot of people are going through, and it's really important to hear what some of the rules are and some practical planning considerations. So, thank you for being here.
Fahlund: Thank you.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.