Divorce isn’t easy. As if the emotional toll it takes isn’t difficult enough, ending a marriage is financially upsetting, as well.
Understandably distracted, there’s one area spouses often give little thought to when in the midst of a split: retirement.
Prudential, informed by a new study from the Center for Retirement Research (CRR) at Boston College, wants to warn divorcees that they’re at greater risk of falling behind when it comes to saving enough to retire comfortably.
According to the Center’s National Retirement Risk Index (NRRI), 50 percent of all households may have inadequate retirement savings. Among households that have experienced divorce, the chance of coming up short is even worse—approximately 57 percent won’t have enough money.
“Millions of American households are at risk for not having adequate retirement income, and the challenge is even more acute among divorcees,” Kent Sluyter, president of Prudential Annuities, said in a statement.
“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,” he added.
Sluyter recommends annuities for spouses considering divorce, especially for the lower-earning party, as annuities can provide guaranteed lifetime income to supplement payouts from other retirement income streams. He also says everyone—no matter their relationship status—should engage in financial planning and consult an advisor.
In addition, Prudential’s report encourages retirement savers facing divorce to factor legal fees, splitting assets and increased living expenses into their financial outlook, in addition to:
- Alimony – Currently, alimony is tax-deductible to the spouse who pays it. The spouse receiving it must report it as taxable income. But in 2019, alimony will no longer be tax-deductible for new divorces, likely to result in lower alimony being paid due to the higher taxes the combined former spouses will have to pay.
- Investments – After divorce, individuals might enter a lower tax bracket. This can be beneficial if they qualify for a 0 percent capital gains tax rate, making investing more affordable and rewarding.
- Homeownership – Often one spouse opts to keep the marital home when divorcing. However, home ownership in high-tax states may become less attractive under the new tax law.
- Children and taxes – Personal exemption deductions have been temporarily eliminated from the federal tax code, but they have been replaced by child tax credits, which are more valuable than deductions. The credits reduce an individual’s tax burden on a dollar-for-dollar basis, so determining which parent claims a child post-divorce is now more critical.
- Social Security – The lower-earning spouse, if married for at least 10 years, may be eligible for a Social Security spousal benefit or survivor benefit that could exceed their own benefit.
“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,” concluded James Mahaney, vice president of Strategic Initiatives at Prudential and author of a companion paper to the NRRI study.
“This is especially important for women, who not only tend to be the lower earner, but also receive less alimony under the new tax law.”
Jessa Claeys is a writer, editor and graphic designer.
