A few months ago, divorce Attorney Ronan Blake sent me an email. He asked to write a guest post sharing his perspectives about how divorce can affect your finances and retirement plans.
Understanding how divorce would affect your retirement is a very important topic that we’ve never directly addressed. Still, I initially planned to decline his offer.
The topic makes me uncomfortable. I suspect it will make readers uncomfortable as well.
Divorces devastate many people’s finances. Yet because it is uncomfortable to discuss, we avoid the topic. Easier for me to write, and for you to read, another article about early retirement health care, safe withdrawal rates or tax planning. No risk there.
After some reflection, I asked Ronan to send me over his article. It’s well worth your time to read. After his thoughts, I’ll respond with my own insights on the non-legal side of divorce proofing your retirement.
The D-word – Not a Stock Market Depression, a Divorce
Saving enough assets to retire takes discipline, hard work, financial savvy, and very likely decades of time. Losing essentially half of your assets is much easier and can happen in a single day. I’m not talking about a recession or a depression, I’m talking about something much worse…a divorce.
Before continuing, the usual legal jargon:
I am a lawyer, however, I am not your lawyer. None of the material written here is legal advice. I most presumably do not practice law in your jurisdiction. I strongly suggest that you speak to a local lawyer about your own situation.
Now, a few comments on how a divorce can impact you and your family’s assets, including all of the assets you probably saved as your retirement funds.
Calculating Property (Asset) Values
As mentioned, all jurisdictions are different and have their own unique laws. As a general rule of thumb, if you separate the law is that the change in Net Family Property will be equalized between spouses. Net Family Property can be thought of as the change in your family’s net worth from the date of marriage to date of separation.
Let’s look at an example to help better understand. Imagine the following scenario:
- You marry young with a net worth of $30,000.
- Your spouse, at the date of marriage, has a net worth of $2,000. Smaller than your net worth but debt free, which for young couples is an accomplishment in and of itself!
- You have a long and happy 30 years of marriage, until suddenly it’s no longer happy and you separate.
- You are an ardent reader of this blog and your net worth is now $2,000,000, which is divided between tax advantaged retirement accounts, the family home, and some other investments.
- Your spouse saved some money of their own, but not as much as you. They have a net worth of $300,000.
Dividing Property (Assets) after a Separation
Each spouse calculates their Net Family Property separately by first taking their date of separation assets and subtracting their date of separation debts, which determines your net worth at the date of separation.
Your date of marriage net worth is then calculated using the same formula. Finally, your date of marriage net worth is subtracted from your date of separation net worth.
Your Net Family Property, based on the above scenario is:
$2,000,000 (date of separation net worth)
– $30,000 (date of marriage net worth)
=$1,970,000 (Net Family Property)
Your spouse’s Net Family Property is:
$300,000 (date of separation net worth)
– $2,000 (date of marriage net worth)
=$298,000 (Net Family Property)
The difference in Net Family Properties is then ‘equalized’. Meaning, you owe your spouse half the difference between each party’s Net Family Property, which is $836,000 (($1,970,000-$298,000)/2).
Also, they expect that $836,000 soon, so start looking into transferring your equity of the home to your spouse, selling some stock, and emptying that emergency fund, because this is an emergency.
As you can see, the goal of retiring early and financial independence is best worked towards as a team. If one person puts in the majority of the work, they may be susceptible to losing a large sum of their assets in a divorce. If both parties had grown their net worth equally, there would be essentially no equalization of Net Family Property.
How A Marriage Contract (Pre-Nup) Can Protect Your Retirement Assets from Divorce
The above scenario is an overly simple explanation of how assets are divided after a separation in accordance with the law. This occurs if a marriage contract does not exist. Spouses can contract out of the relevant governing legislation, which determines how assets are split, through a marriage contract.
A marriage contract (prenuptial agreement) is a domestic contract where spouses outline how their assets and income are treated if a separation occurs. Many people are unaware that marriage contracts can be entered into after you are married, so you can protect your family assets even if you have been married for years.
Marriage contracts can be drafted in a number of different ways and your and your lawyer’s imagination are one of the few constraints. Only want to protect specific assets, like your tax advantaged retirement accounts? You can do that.
This is not to say that merely drafting a marriage contract and having your spouse and you sign it will ensure that the contract is enforceable. To best ensure the marriage contract will be upheld if challenged, make sure that both spouses have received independent legal advice and that full financial disclosure has been exchanged. As noted, every legal jurisdiction is different.
How To Bring Up a Marriage Contract With Your Spouse
To be honest, having a talk with your spouse about a potential marriage contract will likely be awkward. Having the talk as early in your relationship as you reasonably can is recommended; the longer you wait the more your spouse may wonder why this conversation is suddenly occurring.
Encourage them to be involved in the drafting and brainstorming of your family’s specific contract. Having your spouse heavily involved makes the contract more palatable on a personal level and has the added benefit of making it less likely to be set aside by the court.
Additionally, focus on the benefits of a marriage contract. Specifically, that a good and fair contract benefits both parties. Contrary to popular belief, a well drafted marriage contract can help protect the lower earning spouse just as much as the higher earning one.
Regardless of the difficulty in broaching the topic with your spouse, I strongly recommend you speak with a qualified family law lawyer practicing in your specific jurisdiction about a marriage contract. Many local bar associations will help you find a lawyer that you can speak to for up to 30 minutes for free, which is well worth your time! If you need further help finding a lawyer, I recommend you follow these instructions.
Ronan Blake is a family law lawyer practicing in Ottawa, Ontario, Canada.
My $.02 on Divorce Proofing Your Retirement
Thanks to Ronan for taking the time to write this informative piece. I appreciate his understanding of the legal aspects of marriage, divorce and asset protection in a way that I don’t. We like to think of our marriages as romantic relationships, but in the eyes of the law they function more like business partnerships. We need to understand and consider this.
More importantly, thanks to Ronan for pushing me out of my comfort zone and forcing me to address this important, but uncomfortable topic. It has forced me to ask three hard questions that many of us should be asking.
Do You Understand Risk and Relationships?
I avoid lawyers and legalese at all costs. That may be a naive way to approach life and relationships. It has worked well for me to this point, but that may represent being lucky with a small sample of key personal and professional relationships rather than utilizing a solid decision making process.
My wife and I do not have any type of marriage contract as recommended by Ronan in this blog post. After reading his post, I’m not sure a marriage contract would reduce the financial risk for either of us.
We more or less entered the relationship on equal footing and were equal financial partners throughout our marriage. I don’t see where the cost and effort of developing an agreement justify the hassle of spending money and mental energy worrying about complicated contracts.
Besides, I prefer to live my life this way rather than involving lawyers to negotiate every scenario. However, I have to acknowledge that this opens me up to unique risks and requires me to answer the next question.
Are You Truly Financially Independent?
Seeing Ronan’s example makes me realize that a divorce is likely my largest financial risk. It would cause substantial financial distress for each of us in the short term.
We have a great degree of financial independence as a couple. Most likely, neither of us would be financially independent if we had to split our assets and support independent lives and households with them.
Regardless of the specifics of your situation and whether a marriage contract would be useful, an important question to ask yourself is whether your financial “independence” is actually dependant on the stability of your marriage or whether each of you is independently financially independent in the event of a divorce.
A marriage contract may mitigate risk for some people. A better, or possibly parallel, solution may be to build assets to the point that either spouse is financially independent on their own before retiring.
As discussed in a recent post about whether to retire sooner or work longer in order to have a lower drawdown rate, every decision comes with its own risks. Saving enough that both parties are financially independent in the event of a divorce may mean working years longer. This could come at the expense of causing stress on your health and relationships.
This leads to my third question.
How Are You Investing In Your Relationships?
Darrow has written on this site that “A stable marriage is the bedrock of personal and financial success for many of us.” His observation is backed up by science.
Harvard’s Robert Shmerling, MD wrote that the health advantages of marriage include longer life span and improved health span. Among the health benefits cited were improved cardiovascular health and immune function and decreased incidence of depression.
Most people understand the importance of a loving marriage. Yet at times we take our relationships for granted.
No one thinks that divorce will happen after decades of marriage. But statistics show that gray divorce, divorce of those over age 50 is on the rise.
Over half of these divorces are first marriages of people who have been married for over 20 years. It’s difficult to find statistics on how many of these divorces correlate with the life transitions that occur with retirement.
I wrote a year ago that the stress of massive life changes made the first year of my early retirement one of the hardest of my life. My wife and I dealt with these changes and transitions differently and it definitely caused a lot of stress in our marriage.
After nearly two decades of marriage being easy, we needed to work to get our relationship back on track. Two books that we’ve found immensely helpful to create better conversations to reconnect are Gary Chapman’s The 5 Love Languages and John Gottman’s The Seven Principles for Making Marriage Work.
Let’s Talk About Divorce and Retirement
Thinking about relationships and the impact of divorce can be uncomfortable when planning your retirement. But a big piece of retirement planning is assessing risk.
Risk is a combination of likelihood of occurrence of a negative event and the impact of that even if it occurs. Statistics show gray divorce is becoming progressively more common. It would devastate many of our plans if it occurs.
And it takes two to tango. We can’t pretend we have total control of this variable.
Divorce in retirement is a risk we can’t ignore. So let’s start talking about it right now.
Have you taken legal steps to protect yourself from divorce? Would a marriage contract make sense for you?
Would both spouses in your marriage be financially independent in the event of a divorce? Should that be a part of your retirement plan?
What are you doing to invest in your relationship? How have you successfully negotiated rough patches in your marriage? What has been effective in building a lasting love?
Share your answers and any other thoughts and strategies on this important topic in the comments below.
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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. After achieving financial independence, Chris began writing about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. Chris also does financial planning with individuals and couples at Abundo Wealth, a low-cost, advice-only financial planning firm with the mission of making quality financial advice available to populations for whom it was previously inaccessible. Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He has spoken at events including the Bogleheads and the American Institute of Certified Public Accountants annual conferences. Blog inquiries can be sent to firstname.lastname@example.org. Financial planning inquiries can be sent to email@example.com]
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