Will divorce set back your retirement plans?
Divorce unquestionably affects an individual’s finances. Without a dual-income household, living expenses may be higher. In addition, those who divorce after age 50 may need to consider the impact on their retirement planning. Notably, divorce rates in that age group doubled between 1990 and 2010.
The upside of a gray divorce is that any children from the marriage are usually grown. That means that there may be fewer reasons to keep the family home. Downsizing to a new home may be a smart strategy for staying within one’s budget after a divorce. Instead of transferring the house to one spouse, it may be financially better to jointly to sell the house together, in order to share the sales costs.
Divorcing individuals who are age 50 or older have another incentive to maximize their liquidity after a divorce: 401(k) and IRA catch-up rules allow that age group to contribute more to their accounts. Under current law, that means up to $24,000 each year in a 401(k) and $6,500 for an IRA.
It is also important to consider taxes when dividing property in a divorce. Funds in a taxable account should be valued with an eye toward whether withdrawals are taxed as ordinary income, or whether only gains are taxed, possibly at capital gains rates.
Finally, don’t forget about assets that may not yet have vested. For example, Social Security benefits may be available to a former spouse who is age 62 or higher. The benefit is capped at 50 percent of the former spouse’s benefits, and the marriage must have lasted for at least 10 years.
Source: Money, ” Don’t Let Divorce Derail Your Retirement,” Carla Fried, March 3, 2016