Marriage, Divorce And Retirement Security

Hidden realities of breaking up can be harsh for women

By Barbara Taylor

Ms. Taylor is a financial advisor and ING Retirement Coach with ING Financial Partners. She helps clients in the healthcare and higher education sectors with retirement, investment, and insurance planning, and maintains a practice for private clients as well.  Taylor can be reached at [email protected].  Securities and Investment advisory services offered through ING Financial Partners, Member SIPC. Neither ING Financial Partners nor its representatives offer tax advice.

The financial advantages that marriage or long-term partnership affords are commonly understood.  Marriage offers the potential benefit of two incomes, ability to share household expenses and a shared long-term financial perspective.  There also can be a financial advantage to a couple’s ability to “divide and conquer” household responsibilities, particularly when the division of child care duties gives spouses more flexibility for professional ambitions and income growth.

I’ve certainly seen these benefits play out for many of my married clients, especially those with children.  With childcare sometimes costing as much as – if not more than – a mortgage, often couples have more flexibility to strategize and reduce childcare costs.  As an example, a nurse could work weekend shifts, while a spouse works weekdays.  In my role as a financial advisor, I’ve also seen married clients manage unexpected curveballs.  A high-powered attorney couple did not plan to have children – until they had twins.

Together, they were able to figure it out.  He left practicing the law to raise the kids, while she progressed to be a named partner in a large firm.  As the children grew, the husband reawakened his passion for writing screenplays and grew a successful business.  Even for married clients who both have traditional work schedules, shared household and child care responsibilities builds in a layer of financial security.

Not surprisingly, the financial advantages of marriage carry through to retirement readiness. An ING U.S. study1 found that those who were married (or living-as-married) felt more prepared and had independently saved more for retirement – a total of $40,000 more on average than singles and 11,000 more than divorced individuals.  Married individuals were also the most proactive retirement investors; they were most likely to save six percent or more of their salaries into an employer’s retirement plan and to indicate that they knew how to reach their retirement goals.  The study also found that those who are married were the most likely to have life insurance and the highest amount of coverage.

The Hurricane of Divorce

The calm seas of marriage can quickly turn into a financial hurricane when a couple goes through divorce.  I work with many clients who have gone through divorce and have seen first-hand the gut-wrenching and difficult financial situations that can arise.
A client of mine told me that she was entering into a mediated divorce, and that she and her soon-to-be-ex were “working things out amicably”.  I was pleased for her – until I saw his 401k account statement.  He had taken out two loans from his retirement account without her knowledge and had been hiding a pension benefit that was not in the financial affidavit.  While these “oversights” are important to factor in any divorce situation, it was even more important in this situation as my female client was also the primary caregiver for their disabled daughter.

The Reality of Divorce for Women

Introducing gender into the analysis of marital status and retirement readiness widens some of these financial gaps.  The same ING U.S. study found that divorce can take a higher toll on women’s finances, habits and confidence than on men’s.  Only half of divorced women have retirement savings outside of an employer’s plan – the lowest percentage of all groups -, compared to 62 percent of divorced men.
Many women are hit hard in divorce because they have likely earned less and taken time off to care for children and, for these reasons, have saved less for retirement.  Many women in this position may find it tough to “make up the difference” in retirement savings post-divorce.
I’ve seen this retirement savings gap up close and personal.  A female client of mine worked years to put her spouse through graduate school, after which she stayed home to raise the kids. When she re-entered the workforce, she began saving for her own retirement. That’s also when her husband informed her that he wanted a divorce.  Sadly, while her retirement fund was miniscule, she had helped build up his retirement nest egg significantly.

Five Strategies for Divorced Clients

As advisors, we want to help our divorced clients get back on their feet financially.  When working with divorced women, the climb back is often even more treacherous.  Having seen this, I pre-emptively encourage my married female clients, particularly those taking time off to care for children, to take greater control by independently saving for retirement in a tax-advantaged account, such as a 401k or IRA, having a seat at the table in financial discussions, and ensuring that their spouse has adequate life insurance.

The calm seas of marriage can quickly turn into a financial hurricane when a couple goes through divorce. I work with many clients who have gone through divorce and have seen first-hand the gut-wrenching and difficult financial situations that can arise

If that ship has sailed, here are five strategies I’ve used to help my divorced clients, particularly women, re-build their financial lives and retirement security.

#1:  Tune in during the divorce process and division of retirement assets, no matter how painful the experience is.

Women in particular need to be more pro-active about staying informed and protecting their financial rights during the divorce process.  This entails considering what benefits they may be entitled to of their ex-spouse’s retirement assets and Social Security benefits.
It’s also important to consider the specific features of an investment when determining the division of assets and consider their respective values, in particular the tax treatment of different retirement accounts, whether an annuity is jointly owned and home equity. Encourage clients to negotiate the fairest possible deal at the time of divorce.  Returning to court later is expensive and emotionally draining.

#2:  Take advantage of 50-plus catch-up contribution opportunity.

Tax-advantaged retirement savings vehicles, such as 401ks or 403bs, allow those 50 and older to contribute up to $23,000 annually into their retirement plan, compared to $17,500 for those under 50 years old.  This is an excellent way to play “catch-up” with retirement savings if a divorce has set a client back in their retirement savings.
Saving in an employer-sponsored retirement plan offers excellent opportunities to jump start retirement savings. Many plans have an employer-match program that is essentially “free money” to put towards retirement. In addition, money can grow tax free in Roth 401ks and Roth 403bs offered within many employers’ retirement benefits packages.

#3:  Know your social security options and be strategic and smart about which benefits you take and when.

Clients must be at least 62, currently unmarried, and have married to their ex-spouse for at least 10 years to collect on an ex-spouse’s Social Security.  Social Security will compare benefits based on an individual’s own work history, compare it to the benefit to which he or she would be entitled from the former spouse and give the individual the larger of the two benefit amounts. This won’t affect the benefits of the former spouse and any of their current or future spouses.
When to take benefits is a key consideration. If the client is still working and hasn’t reached full Social Security age, delaying the start may be necessary, as benefits are greatly reduced if earned income is over $15,120 a year.

#4:  If there are dependent children involved, make sure the divorce settlement requires the ex-spouse to have life insurance on themselves with the children named as beneficiaries.

Review all life insurance policies, paying close attention to beneficiary and ownership designations. Make sure there are sufficient proceeds to cover any child support and education expenses if a parent dies unexpectedly. In addition, it’s important to know how the premium is getting paid. The client will want to legally establish that they will be notified if the policy is in danger of lapsing.
A client of mine dealt with this very painful issue recently.  She had divorced 15 years ago, and had a decree that ordered her ex-spouse to maintain his life insurance until the minor child was finished with college.  He passed away unexpectedly and had never kept up the premium payments to the insurance company.  Fortunately, however, my client continued paying the premiums on a policy that they had when they married, which turned out to provide a benefit sufficient to completely pay for their son’s college expenses.

#5:  Don’t rob your retirement to pay children’s college education costs.

Clients, particularly women, who are divorced, working and still caring for children need to avoid the risk of investing in their children at the expense of their own retirement.  Without the benefit of a two-income household, divorced individuals need to make sure they are prioritizing their own retirement.
Many of us have gotten scared by the industry studies that indicate that widows and divorced women will change financial advisors after the death or divorce of their spouse – perhaps because those women feel that their husband’s financial advisors have not taken the time to listen and build a relationship with her.  Women are looking to financial advisors for knowledge and guidance.  Offering plans that respond to women’s specific concerns will demonstrate that you have listened, respect what she has to say and are committed to finding the right solutions to serve her needs.
1 Findings are from an online survey conducted by ORC International on behalf of ING Retirement Research Institute during the period of Oct. 5-13, 2011.  Respondents were 4,050 adults between the ages of 25 and 69 who are employed full-time with an annual household income of $40,000 or greater.  Data was weighted to make the results representative of the U.S. population.