Divorce can majorly impact your financial security. The impact of divorce on women is particularly acute since women tend to earn less than men.1 Whether you are relatively young and have decades to rebuild stability or belong to the growing gray divorce demographic, divorce can change the picture you had in mind for life in retirement.2
Fortunately, there are ways to get your retirement savings back on track after a divorce. Discover how retirement assets are divided during a divorce. Then, learn how to reassess your finances post-divorce and rebuild your retirement nest egg.
Dividing Retirement Assets During a Divorce
Retirement savings that predate the marriage are usually considered separate property. But any retirement savings set aside during the marriage qualify as marital assets. So, they're up for grabs by both spouses during the divorce proceedings.3
How states split marital assets
How marital assets are divided depends on the state where you live. States that follow equitable distribution rules divide retirement accounts in ways that are fair but not always equal. In other words, don't expect a 50-50 split.3
States that use the community property approach—which most do4—consider any asset acquired during the marriage to be jointly held. These states usually divide it 50-50.3
Knowing how your state treats marital assets will help you understand what to expect during a divorce.
Taking ownership of retirement assets post-divorce
Once both parties decide how to split retirement assets, the money is transferred. If you're receiving retirement assets, you can put them in a retirement account in your name or cash out.
Cashing out may be tempting, but it often comes with costly tax implications. For example, if you take a distribution from a 401(k), you will be taxed at the ordinary income tax rate and potentially face early withdrawal penalties if you're younger than 59 and a half.3
It's smart to discuss any big moves with a financial advisor so you don't wind up with a tax bill you weren't expecting.
Dividing Social Security Benefits
If you were married to your ex-spouse for 10 years or more and you haven't remarried, you may be eligible for your former spouse's Social Security benefits. There are some caveats about who can claim Social Security benefits for an ex-spouse, as well as when and how. Review the Social Security Administration's criteria on benefits for a divorced spouse, and consult your attorney with any questions.5
What if your ex dies before you file for Social Security? Assuming you were married for at least 10 years and have not remarried, you can get the benefits a surviving spouse would receive.5
Financial Planning Tips After Divorce
Money may not seem like it's going as far post-divorce because you've lost that buffer of a second income to cover expenses.6 Financial planning can help you get back on track with retirement planning and other financial goals.
Revisit your budget
A budget is a plan for how you'll spend money. It takes your income and assets into account, as well as any money you owe. When you understand your income and assets, you can make a plan to pay expenses and debts.
Sources of income include salary, spousal support, child support, bank account balances and personal assets. Post-divorce, there may be extra expenses like legal fees or car payments since you're no longer sharing a vehicle with your ex.
Make a monthly budget that reflects your income, debt and anticipated future expenses—things like tuition for school-age children, for instance. Building a revised budget will help you understand your income and expenses so you can reassess your retirement strategy.
Change beneficiaries
Chances are, your ex was listed as the beneficiary on your retirement accounts, life insurance policy and other important accounts. The divorce doesn't automatically remove your former spouse as the beneficiary. If you no longer want them to inherit money, you'll have to take this step once the divorce is finalized.7
Post-divorce Retirement Planning
If your former spouse was setting aside money for your retirement, it's time to make a new plan—one that uses your income and assets to save for retirement.
How much do you need to retire?
This retirement checklist can help you assess your retirement readiness. And women should especially consider how their longer life expectancy may affect the size of their nest egg.
When planning for retirement, it's wise to think about how you want to live, not just how long you expect to live based on things like family history and health.
A retirement calculator, such as this fill-in-the-blanks one from Vanguard, can help you crunch through different scenarios to come up with a realistic savings goal.
Your retirement savings goal is personal to you. It's a reflection of your wants and needs. Depending on what that figure is, you may need to delay your retirement date and continue working for longer than you'd previously planned.
Saving for retirement after a divorce
Once you know your number, there are several strategies to hit it. You might need to increase your contributions, keeping in mind retirement account contribution limits. Save what you can, even if it's small. Trim your budget and save more. Some frugal spenders see it as a game and enjoy finding creative ways to save.
Switching your asset allocation for portfolio growth is another option. When it comes to investment strategies and asset allocations, consulting a financial advisor who has a fiduciary duty (meaning their advice must be in your best interest) can help.
If you're over age 50, you may want to take advantage of catch-up contributions, which are higher ceilings than the standard contribution limit.8 By allowing those over 50 to put aside a little more each year, the IRS incentivizes workers nearing retirement age to save more.
Protect and Grow Your Retirement Savings
Once a divorce is on the table, be proactive. Seek professional advice from an independent third party, such as your lawyer or financial advisor.
The sooner you understand your options, the sooner you can act to protect your retirement savings and maintain your quality of life post-divorce. And while you're putting the pieces of your new financial plan in place, look for ways to protect and grow your retirement savings. An IRA money market account can work well because it offers tax advantages. You can contribute whenever you'd like, as much as you'd like (up to IRS limits).
Lindsey Danis is a freelance writer with more than 12 years of experience covering personal finance, travel and LGBTQIA+ topics. When not writing, Lindsey is often found hiking or kayaking near her Hudson Valley home.
READ MORE: The Good News About Women and Money
Sources/references
1. Aragão, Carolina. Gender pay gap in U.S. hasn't changed much in two decades. Pew Research Center. March 1, 2023.
2. Divorce After 50: The Impact on Retirement Savings. Charles Schwab. October 2, 2023.
3. Gravier, Elizabeth. How IRAs, 401(k)s and other retirement accounts are divided in a divorce. CNBC Select. April 11, 2022.
4. Laurence, Bethany K. Debts & Marriage: Debts & Property in Common-Law States. Nolo. June 20, 2022.
5. Benefits for Your Family. Social Security Administration. Accessed January 9, 2024.
6. Nargi, Lela. Divorce Can Wreck a Woman's Financial Future. Here's How to Rebuild. The New York Times. May 17, 2023.
7. Cussen, Mark P. How to Split IRAs and Other Retirement Plans During a Divorce. Investopedia. April 6, 2023.
8. IRA contributions: Should you catch up if you were never behind? Vanguard. April 13, 2023.
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