Retirement Planning Insights for Divorcing Baby Boomers

As a divorcing Baby Boomer (between 47 and 65 years old), you may face the intricate retirement planning challenge of partitioning your accumulated assets and intertwined accounts. After seeking the guidance of a qualified attorney who is knowledgeable about relevant state laws to dividing assets, you can secure a comfortable retirement nest egg by working with a divorce financial planner to assess your retirement planning options and build a sound foundation for your late-in-life finances.

First of all, protect your retirement interests during the divorce process by obtaining the necessary legal documents, such as a Qualified Domestic Relations Order (QDRO), to delineate how your retirement plan will be split up and evaluate the type of payment transferred. Recognize that a defined contribution plan [i.e. 401(k)] is easier to divide than a defined benefit plan. Also, realize that you and your former spouse can either agree to divide the account or choose to take all of these qualified retirement account funds after offsetting its value with other assets. Read “Dividing the Nest Egg in Divorce” to help you protect your rights and ensure financial stability during your golden years.

In addition, weigh the financial merits and drawbacks to having your Individual Retirement Account (IRA) included in the lists of assets you retain post-divorce. Be advised that funds in your IRA, like most retirement plans, cannot be tapped before the age of 59 ½ without triggering a 10 percent tax penalty for early withdrawal and ordinary tax income. When all retirement assets are divvied up, you can receive a portion of your former spouse’s accounts via a trustee-to-trustee transfer of funds into a new IRA. After collaborating with an expert tax professional or financial planner, decide if you will divide your retirement portfolio by percentages or dollar value. If you elect to split up these funds by dollar value, be cognizant that sudden market shifts can cause a change in retirement account value between the time a divorce resolution is reached and when the account is actually partitioned.

Once the divorce court determines what amount of retirement savings and overall assets will be transferred to your former spouse, it is also pivotal to strategize a steady cash flow for your post-divorce years to establish monetary security and sufficiently take care of future living needs. Proactively plan ahead and approximate to meet your unique living expenses by compiling an accurate inventory of essential and discretionary living expenses to gauge how much income you will need. In consultation with a divorce financial planner, who can assist you in gaining financial control from possible economic uncertainty, account for budgetary projections and calculate what realistic financial resources you will have to pay for your retirement. Perform a thorough capital needs assessment to substantiate the estimated growth rate of current savings over the next 20 to 30 years and discover how interest rates and evolving economic conditions can affect your current funds after retirement.

Prior to implementing a long-term post-divorce plan for retirement accumulation, you should make it an initial priority to fortify your emergency fund of at least three to six months of non-discretionary living expenses in cash (i.e. savings and money market). Also, appropriately assess your life, health, and diverse insurance needs, as catastrophic bills can potentially be the most prodigious threat to sustaining family retirement planning and wealth. Clearly, it is prudent to establish a sturdy safety net in the event of an unexpected emergency and to properly determine your insurance needs, considering single parents are the group who are least likely to have life insurance.¹ In addition, double-check all your tax-deferred retirement savings vehicles, including your 401(k), Roth 401(k), IRA, and Roth IRA, to ascertain that your designated primary and contingent beneficiaries are updated.

While going through the divorce process, you should resolve whether you may need to increase your employer retirement plan contribution percentage. Take advantage of the power of compounding in accruing your future retirement funds by continuing to make disciplined contributions to qualified tax-advantaged vehicles. If you are at least 50 years old (or will be by December 31), think about making an additional $5,500 catch-up contribution in 2011.

Start focusing on your retirement planning by being cognizant of you own tolerance for risk and accepting that your lifestyle may change after divorce. With the appropriate assistance from qualified financial and legal professionals, you can cultivate a retirement strategy during the divorce process that will be adaptable to your new individual and family financial circumstances.

Overall, by applying these practical retirement suggestions, you can succeed in handling the financial planning challenges of divorce and ensure yourself of a fulfilling life.

¹ 2011 Genworth Financial LifeJacket Study; also, cited in March 25, 2011, Financial Advisor Magazine feature, “Most Single Parents Lack Life Insurance, Study Says.”

Additional Resources:

• The Perfect Storm: Divorcing Baby Boomers
• Retirement Considerations When Divorcing

FPA member Elaine King, CFP^®, CDFA™, is the founder of Family & Money Matters Institute in Miami, Fla. FPA member Philip Herzberg, CFP^®, MSF, is Director of Media Relations & Public Awareness for FPA of Miami-Dade.