The rate of silver divorce – divorce among Americans aged 50 and older – has doubled since 1990. There is a significant emotional cost to ending a long term marriage, but splitting later in life also causes unique economic challenges. Specifically, when elders divorce, each partner’s financial status weakens with the division of assets. Adding to an already complex situation, people in their 50s have fewer working years remaining to recover lost income, explains Jamie Hopkins, Co-Director of The American College New York Life Center for Retirement Income.
This final installment in our Silver Divorce blog series looks at defined benefit plans. Though once a common employee benefit, defined benefit plans – pensions – are rare for today’s corporate employees. However, pensions have survived as a routine benefit for faithful service among many working in law enforcement, teaching, state and local government, military, nursing, insurance, finance and manufacturing industries. These workers typically rely on pension benefits as a core component of their retirement income strategy.
Substantial amounts of money are often at stake during divorce when employees in their 50s and older have made contributions to their pension funds for a lifetime. Prudent advisors will keep the following in mind to avoid an arduous pension division process.
Empathize with the symbolic meaning of a pension
The majority of people who receive pensions have challenging and risky careers. They often feel the pension is their reward for performing difficult or dangerous work. A spouse may become angry or hurt if he or she is expected to share the asset they earned through such demanding work. Remind the account owner in this case that their spouse’s time, supplemental earnings, or even emotional support likely contributed to their ability to perform their job and the pension’s value is tied to the collective efforts of the marital partnership.
Draft the Qualified Domestic Relations Order (QDRO) immediately
A QDRO is needed to divide and transfer pension funds. It’s best for the client’s attorney to draft the QDRO while the settlement terms are negotiated so it can be certified by the court at the same time the divorce decree is entered. It is very important to begin and complete the QDRO as soon as possible. If one partner should die during the divorce but before the QDRO has been fully executed, the surviving spouse may be unable to collect the share of the pension to which they are entitled.
Take steps to ensure the client receives their share of benefits
A pension’s future benefit earned during the marriage is considered a joint asset, even if the account holder has not begun to withdraw funds. The share of the pension value each spouse is eligible to receive should be spelled out in the settlement decree. A partner must take legal action prior to the divorce to receive their share of pension benefits, not later when the spouse retires. If multiple pensions exist, each one must be listed individually on the settlement agreement. Failure to do so may result in the partner being denied his or her share of the pension to which they are entitled.
Consider whether the best option is to leave the pension intact
Pensions are highly technical and notoriously difficult to split. To avoid a complicated and costly division and transfer, it is sometimes preferable for partners to trade off assets. This means arranging for the owner of the pension to keep it in his or her name and give the spouse marital assets at a value equal to their portion of the pension. To negotiate a fair trade, the value of the pension must be known. If trading assets, the client’s attorney will convert the future dollar value of the pension to present day dollars then factor it into the couple’s overall assets and debts.
Most clients have difficulty understanding the technical details of complex pension assets. Your help is needed to support clients as they focus on the steps required to divide or transfer assets during divorce. Your guidance and expertise can be a lifeline to late-life divorcees who will need to rebuild financial stability and create a secure retirement income plan.
The Retirement Income Certified Professional® (RICP®) designation from The American College of Financial Services provides advisors with expertise and comprehensive retirement income competencies that help them guide silver divorcees to a fresh start. Learn more now about how earning an RICP® designation can accelerate your success as an advisor with this growing demographic.