Could Divorce Derail Your Retirement? What You Need to Know

Going through a divorce? Its effect on your retirement might not be your first consideration. But it’s important to understand how post-divorce finances could impact your retirement.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Derail: Could divorce throw your retirement plans off track?
5 min read
Photo by Getty Images

Key Takeaways

  • Your ex might be entitled to part of your retirement account
  • Make sure you transfer retirement assets with a qualified domestic relations order (QDRO)
  • In some cases, a prenuptial agreement could help protect your assets

When you’re thinking about the future and planning for retirement, divorce isn’t usually high on the list of considerations. But if it should happen, divorce could have an impact on your ability to retire as planned. In fact, according to a survey from TD Ameritrade, 40% of divorcees said that the end of their marriage threw their retirement plans off track.

“Planning your finances around the potential end of a relationship due to divorce or death can be uncomfortable, to say the very least,” said Keith Denerstein, director of investment and guidance at TD Ameritrade. “Although the trepidation is understandable, planning around these possible scenarios is important for your future livelihood.”

What Issues Impact Retirement After Divorce?

When managing estate planning documents and retirement accounts, one of the biggest mistakes is not making sure all your beneficiaries are updated, according to Dara Luber, senior manager of retirement product at TD Ameritrade.

“Take some time to make sure everything’s updated, because your beneficiary information is what matters later—not what’s in your will,” said Luber. “Work with your retirement account custodian to update your beneficiaries or your ex could get the account, even if they remarry.”

Luber also pointed out that, in some cases, an ex-spouse might be entitled to a portion of your retirement account. If you have a plan with an employer, such as a 401(k), you’ll need a qualified domestic relations order (QDRO) from a judge to help you avoid tax issues that come with taking money from your account for your ex-spouse. If you have an IRA, you’ll have what’s known as a “transfer incident.”

In either case, it’s important to let your custodian know what’s going on so the money is moved into another tax-advantaged account for your ex without causing you tax-time headaches.

And, of course, the divorce might change how you save for retirement or your timeline. If your spouse is entitled to a chunk of your account, you might need to plan to work a little longer or boost your contributions to make up for that loss.

“Don’t forget about other post-divorce obligations in your planning,” Luber noted. “Child support and spousal support could mean a hit to your income and a change in how you manage your retirement planning.”

Claiming Your Ex’s Social Security Benefits

You might be able to claim spousal benefits based on your ex’s Social Security earnings. For those who stayed home to care for children or for other reasons during their working years, being able to claim a spouse’s benefits might be useful.

You do have to meet certain requirements to attempt this maneuver, though:

  • You must have been married at least 10 years.
  • You can’t be remarried.
  • Your ex must be at least 62.

Be aware that when you place a claim on spousal benefits, it could trigger a requirement that your ex begin taking their own Social Security benefits, regardless of their previous plans.

Can a Prenup Protect Your Retirement During Divorce?

The TD Ameritrade survey found that 97% of respondents didn’t have a prenuptial agreement during their previous marriage. But 42% of them said they’d get a prenup if they remarried. In some cases, a prenuptial agreement can help protect your assets and a portion of your retirement account.

But Luber warned that a prenup isn’t a guarantee that all your assets—even those in your retirement account—will be kept from your ex.

“It really depends on how the agreement is written and how it takes into account the assets you brought into the marriage,” said Luber. “The state you live in also matters.”

When considering remarriage, Luber pointed out that it’s important to think carefully about the impact it will have on your assets and your children.

“What do you want to be divided between your children and your new spouse? If you’re each coming in with property and assets, and you know you don’t want it all going to your new spouse, this is a conversation you need to have,” said Luber. “It may be uncomfortable, but it’s important to protect you both. A prenup, properly crafted, can help.”

Bottom Line: Be Ready for What’s Next

Although most Americans (87%) over age 40 are confident that they could manage their finances in the event of a divorce, more than 40% lack a financial plan that considers the potential of divorce. No one plans for a marriage to end, but the possibility is an important part of looking at your finances. In fact, your spouse could be contemplating the situation. The TD Ameritrade survey discovered that 33% of respondents delayed divorce for financial reasons.

Consider taking some time to think about how you would approach your finances in the event of a divorce. Do you have your own accounts? Do you need to talk to your spouse about where you stand and be honest about the state of your marriage? Are you aware of choices like claiming Social Security spousal benefits?

“Planning ahead could provide a much-needed boost in financial security for those who unexpectedly find themselves in these difficult situations,” said Denerstein.

What’s the State of Your Estate ?

Use this checklist to help make sure your estate plan wishes are known and necessary documents are in place.

Download PDF

Print

Key Takeaways

  • Your ex might be entitled to part of your retirement account
  • Make sure you transfer retirement assets with a qualified domestic relations order (QDRO)
  • In some cases, a prenuptial agreement could help protect your assets

Related Videos

Call Us
800-454-9272

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances. adChoicesAdChoices

Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 TD Ameritrade.

Scroll to Top