Divorce and Retirement Risks

Quick Answer: Divorce can significantly impact retirement plans. Learn how to protect your financial future with safe money alternatives. Explore your options today!

According to the American Psychological Association, about 40 to 50 percent of married couples get divorced. While it’s no secret that divorce disrupts lives, it can also threaten a divorcing couple’s financial future, according to new research.

The Center for Retirement Research at Boston College (CRR), with the support of Prudential Financial, just released a study. Their findings? Divorced Americans are at greater risk of not being able to maintain their standard of living in retirement. 

The study compared the risk divorced households face using the center’s National Retirement Risk Index (NRRI). It revealed divorced households have a 7-percentage-point greater risk of not having adequate retirement income than households not experiencing divorce. Among all households, exactly half are at risk of not having adequate retirement income.

“Millions of American households are at risk for not having adequate retirement income, and the challenge is even more acute among divorcees,” said Kent Sluyter, president of Prudential Annuities. “These are sobering numbers that highlight a fundamental shift that needs to take place in the way we think about retirement. Instead of solely thinking about accumulating savings, people also need to consider a plan for protecting and generating retirement income.”

Challenges to Retirement Readiness

The study, researched by Alicia H. Munnell, Wenliang Hou, and Geoffrey T. Sanzenbacher of the CRR, painted a sobering picture of the financial challenges divorcing couples face.

“Divorcing couples must pay legal fees, split illiquid assets, and lose the economies of scale from having one instead of two households,” the study reports. “These changes almost certainly inhibit each spouse’s ability to save for retirement.”

Another challenge is missing out on IRA or 401(k) assets.

According to researchers Angela A. Hung and David Knapp in their working paper, “Impact of Divorce on Retirement Security,” in roughly half of divorces involving liquid retirement assets, such as money in an IRA or 401(k) account, “all the retirement assets went to one spouse, leaving the other with none. This can happen when, for example, a spouse chooses to forego his or her share in an IRA in exchange for receiving all of the equity in the couple’s house.”

Setting a New Path for Retirement When Divorced

So how can the newly single make up for these anticipated losses? And what other factors should they consider?

James Mahaney, a vice president in Prudential’s Strategic Initiatives unit, is the author of a companion paper to the NRRI study. He says that the Tax Reform and Jobs Act will likely make it much harder for divorced spouses to secure their financial futures.

But he notes that new planning opportunities have arisen as well. He recommends people who are divorcing or contemplating divorce consider these key financial issues:

Alimony

Taxes are always an important part of the retirement equation. This is also the case with how it applies to alimony. Alimony has been a tax deduction for the spouse who pays it. Generally, this is the spouse who is the higher earner. In turn, the spouse who receives alimony must report it as taxable income.

However, the Tax Cuts and Jobs Act of 2017 changed things. In 2019, alimony will no longer be tax-deductible for new divorces going forward. As a result, both former spouses now must pay higher taxes — remember, alimony won’t be tax-deductible anymore, and it already counts toward the taxable income of the recipient. Therefore, it’s likely to lead to lower alimony being paid.

Investments and Taxes

After getting divorced, people may be in a lower tax bracket. It may be beneficial if they qualify for a zero-percent capital gains tax rate.

However, there may be trade-offs for that potential advantage. When both spouses worked but had different incomes, marriage provided a bonus. That is because the tax brackets for married couples are wider than they are for single filers. It allows more of the household income to be taxed at lower rates.

The reverse is true when spouses have similar incomes. Divorce prevents couples from enjoying this benefit.

Social Security – Spousal Benefits

If you are divorced, here’s an important test for Social Security benefits. Were you the lower-earning spouse and were you were married for at least 10 years? Then you may be eligible for a Social Security spousal benefit. Or you may qualify for a survivor benefit that could exceed your own benefit. Prudential provides this example:

• Susan, 75, is collecting $20,000 annually in Social Security benefits.
• She was married for 12 years, then she and her husband divorced 30 years ago.
• Now, her ex-husband dies while collecting $30,000 annually.
• Susan’s benefit would then “STEP UP” to a “SURVIVOR BENEFIT” of $30,000—regardless of whether her ex-husband had remarried or not.

Explore Retirement Income Options

Careful planning may help divorced individuals improve their retirement readiness.

“With so many factors to consider, it is more important than ever for divorcing couples to assess their financial plans and find opportunities to stretch their wealth and think about future income streams as they prepare for retirement,” Mahaney said.

“This is especially important for women, who not only tend to be the lower earner, but also [may] receive less alimony under the new tax law,” he concluded.

Reinforcing a Retirement Portfolio with Income Protection

People of all backgrounds face the challenge of a potentially decades-long retirement, thanks to advances in medicine and technology.

Prudential’s Sluyter believes Annuities can offer a layer of protection: “They can come with guaranteed income and other features to help generate income to supplement other retirement savings. And for people who are divorced or are contemplating divorce, Annuities can be particularly important, particularly for the spouse with lower income.”

As we have seen, divorced couples have many financial issues to consider: for instance, alimony, home ownership, investments, and taxes, not to mention their own retirement saving journey.

Need Help with Creating More Income Certainty?

If income longevity is a concern for divorced persons, an experienced financial professional may be able to assist them.

They can guide them on ways to preserve their retirement assets and begin building dependable, lifelong income streams. Studies show that people who work with a financial professional report higher retirement savings, better financial outlooks, and higher overall peace of mind.

Should you believe you could benefit from this guidance, financial professionals at SafeMoney.com can help you. Use our “Find a Financial Professional” section to connect with someone directly. If you need a personal referral, call us at 877.476.9723. 

Frequently Asked Questions About study divorce compounds retirement risks

How does divorce affect retirement savings?

Divorce can drastically alter your retirement savings by splitting assets, which may reduce the amount you have saved for retirement. Additionally, the costs associated with divorce, such as legal fees and potential alimony, can further deplete your financial resources. It's essential to reassess your retirement plan and consider safe money alternatives to protect your future.

What safe money options are available after a divorce?

After a divorce, you may want to explore safe money alternatives like fixed annuities, which can provide a steady income stream during retirement. Other options include high-yield savings accounts or certificates of deposit (CDs) that offer security and predictable returns. Evaluating these choices can help you rebuild your financial stability.

Can I change my retirement plan after a divorce?

Yes, it's crucial to revisit and potentially modify your retirement plan after a divorce to reflect your new financial situation. This may involve reallocating assets, adjusting your savings strategy, or incorporating more safe money alternatives to ensure you have a secure retirement. Consulting with a financial advisor can provide valuable insights tailored to your circumstances.

What should I consider when planning for retirement post-divorce?

When planning for retirement after a divorce, consider your new financial landscape, including any changes in income and expenses. It's important to account for the division of assets and how it impacts your retirement savings. Prioritizing safe money alternatives can help safeguard your investments and provide peace of mind as you navigate this transition.

Take the next step, run the numbers with our free retirement calculators.