Divorce Proof Your Retirement

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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.

Examining the effects of divorce on retirement plansUnderstanding 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:

  1. You marry young with a net worth of $30,000.
  2. 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!
  3. You have a long and happy 30 years of marriage, until suddenly it’s no longer happy and you separate.
  4. 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. 
  5. 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 chris@caniretireyet.com. Financial planning inquiries can be sent to chris@abundowealth.com]

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  1. In the United States 70% of divorces are initiated by the wife. If both spouses have a college degree, that increases to 90%.

    1. One of the interesting points I read about in researching this post is that financial independence may make divorce more likely and may be a contributing factor in the rise in “gray divorce.” In the past, women were often stuck in relationships b/c they were financially dependent on men.

  2. I’m divorced. When we were married, my husband and I considered all of the income and assets to be jointly owned and equal (whatever name they were titled in) and not separately owned. We both considered each of our contributions to the marriage partnership to be equal and important. The reason his income was high was because I took care of the kids and did everything else so he could concentrate on work. His social security is also much higher than mine. When we separated we equally separated the assets, including future assets like social security. No, neither one of us has the same amount of total money that we had as a couple, but as single people our expenses are less, although not one half of a couple’s expenses. I think it’s better to take the high road if possible, especially if the ex-spouse is your children’s parent. There’s more at stake than money when people divorce. Divorce changes a lot of plans, not just monetary ones, and regardless of whether you’ve somehow protected assets from your ex, many things are uncontrollable.

    1. Thanks for sharing your experience and insights Susan.

      Interesting insight on spending as singles as compared to a couple. I assume that each of our spending would be >50% of our spending as a couple due to the economy of scale with things like housing and utilities.

  3. I have a friend who had to work into his mid seventies because a series of divorces. For a retiree this is a nightmare. Thankfully my wife says she is not getting rid of me. We could live on half of our income each. But not at the standard of living we do now. One thing about where we live , housing is expensive. Our home is paid off. So the option there is one spouse keep the home and adjust the rest of the divided assets or sale it , divide the money and both move to a cheaper area. All bad choices. No one ever wins in divorce .

    1. Nightmare is a great word and agree no one ever wins in a divorce. Yet few people talk about it. Hopefully this will help get people talking rather than waiting until it’s too late.

    2. I am going to respectfully disagree with your statement that no one wins in a divorce. Though I did not want to end our relationship at the time (we were just shy of 20 years together at that point), I can say that I am much better off, even financially, at this point. Yes, that took a bit of time, and yes, I think we were fairly unusual in the way we treated each other. But, I know my life is better, and I hope his is too.

      1. Agree that there are situations that are toxic and even abusive where divorce is the best solution.

  4. I agree with Ronan that this is a scenario to think about. We started from nothing and built our wealth as a partnership. My spouse’s private graduate school tuition and living expenses was funded by my salary but ever since then, we both worked. And when we started a family, she left the workforce to care for the little ones and only came back part time once the kids were in school. But over 23 years, I’d say we pretty much both put in equal effort into household wealth creation so an even split would be reasonable. Hence, I don’t think we’d benefit from anything other than a cheap lawyer to legally split what we’d agree upon ourselves. Fortunately, we mostly see things the same way so if this “disaster” happens, I don’t anticipate a different outcome based on the general laws in the books. A bad situation, but survivable.

    That said, it’s not a bad idea to mentally review risk tolerance for other disasters like the possibility of one spouse getting a long-term illness that requires the spouse to be in a facility for a decade or longer. And scenario planning for a huge drop in the market due to catastrophic events (e.g. pandemic that kills millions, multiple large terrorism events, etc) to figure out if you have an emergency exit is prudent.

    As for me, if I can still manage to afford a small rental place, get decent healthcare, put food on the table and have modest transportation after such worst case disasters occur, I’m good. Shit happens and disaster planning is prudent.

    1. I agree that it is wise to consider these types of worst case scenarios. It’s certainly not fun to think about. But, consider how much time is spent discussing a market crash that would cut your net worth by half. First off, a scenario where markets drop by 50% or more is rare, and most people will adjust plans so the loss is only that large on paper and temporary. In contrast, little is written about divorce which happens every day and produces real losses of 50% (+ legal fees) for many people.

  5. Those who live in community property states (basically the entire American Southwest) should disregard the calculations in this article. Unless there is a pre-nuptial agreement or the spouses have been assiduous in keeping their pre-marriage and inherited assets separated, everything, including future retirement income, will be split 50-50.

    1. Thanks for chiming in Bill. This is something I questioned Ronan about and asked him to keep general as laws vary from place to place.

  6. It’s uncanny how this topic just came up. I’m 95% sure my wife and I are headed down this path. I’ve been wondering why none of the FIRE blog address this… Mr Money Mustache came the closest. It’s even more uncanny that the scenario portrayed is as if he had copied our financial statements. I’ve been researching/contemplating how I’m going to live on my share, especially since I just recently pulled the trigger on FIRE…with my wife’s encouragement. We both still care about each other so I think it will be as amicable as possible. I’ve spoken with a financial planner who has a specialty in collaborative divorce agreement. The goal is to come up with an agreement that is best of a bad situation for both parties. It gets run past a lawyer the advisor works with to make sure it will pass through the courts. Statistically it’s less costly and both parties come out of it more satisfied. Thank you for addressing this. Hoping the 5% chance comes through.

    1. Sorry that this is so timely. Here’s hoping as well that you are in the 5% and if not it works out as well as possible for both of you.

      Best wishes!

  7. I experienced this a few years ago and it certainly reset the retirement options at least time horizons. After a 50-50 split I’m working to rebuild and increased savings rates significantly. We had an amicable separation that saved a lot of money and anxiety. I’ve since remarried which adds it’s own financial considerations. We chose to apply a pre-nup as we both have assets and kids to consider. We are working through what expenses to share and separate as well as considered issues like if we share her (paid for) home and she passes before I do how to not become homeless. There’s a decent amount of information on remarriage planning out there which helped a ton. Take care of your marriage and be wise about how to manage when that is no longer an option.

    1. Thanks for sharing Mike.

      Sorry to hear about the split, but sounds like you’ve made the best of the past and are taking what you’ve learned and moving forward which is sometimes the best you can do.

      Best wishes!

  8. From the world of commercial aviation: the best retirement program is the “one-wife” program. That being the case, it pays to invest in the relationship…

    1. It definitely pays to invest in the relationship, and the rewards are far more than financial!

  9. @JDave –
    “In the United States 70% of divorces are initiated by the wife.”

    Men – pay attention to this! and pay attention to your wife.

    1. Wise words for all of us to pay attention to our spouses, and if that stat is accurate especially good advice for us guys.

  10. In the case outlined – it appears that one spouse had accumulated the majority of the assets… ( seems that is often the case) The company I work for is one of the few companies still offering a pension. I have known several co-workers that went through a divorce PRIOR to retirement thus the value of the pension was used in the calculations or assets – however , as mentioned as “the grey divorce” , none after they had actually retired – if one spouse had taken and or started retirement and was drawing a pension and the other is still working – with both having about the same income ( one from pension – one from work) – how would that play out ? Would the pension still be considered an asset and thus used in the calculations – that could be a major set back for the one drawing – almost unfair to that person as the other is still employed.

    1. Interesting scenario that I am not qualified to give much insight into. I would imagine the pension would be viewed as an asset b/c the other spouse will at some point retire. Also would assume how it would play out would vary based on other assets and what jurisdiction they live in. For a person concerned about this situation, that would be a situation to ask an attorney specializing in these situations about.

  11. 32 years married, then divorced. I was a SAHM while the ex climbed the corporate ladder. I am very thankful that we were LBYM so there was about $2M to split 50/50, plus me at 61 and out of the workforce, he has to pay alimony. What Bill said above – it is 50/50 including his parents inheritance that was co mingled. 50/50 includes half his pension since we were married the entire time he earned that pension.

    Divorce = weapon of mass financial destruction.

    I am grateful we saved, but my standard if living is not what I was expecting as I am entering retirement age. I am sure his is not either as his new wife had debt and now he has to support another family while I just have to take care of me.

    Divorce stinks financially.

    1. Thanks for you willingness to share Elizabeth. Agree with your last statement, and would assume the “stink” extends beyond the financial aspects. I hope to never know!

      Best wishes,

  12. I would like to see some advice for older singles, both with substantial net worth, contemplating marriage. Having been twice divorced my inclination is to NOT marry, period, but there must be some safe and no-fault way to insure in the event a marriage of two people in their 60’s, both financially secure would not have to involve lawyers, accountants etc. to insure and minimal harm exit should things not work out. People change when they get married, another good reason not to. I think it should be like a lease with options to renew if all is well. Obviously assets should not be co-mingled and ownership of a shared house should be as tenants in common if the contribution is not 50/50.

    1. I think there is a safe no-fault way to insure assets in a marriage. I also think there is a way to not involve lawyers, accountants, etc. But I’m not aware of any way to do both simultaneously.

      I suppose you could come to a written agreement on your own, but I’m not sure how that would hold up in a court of law in the event of a separation.

    2. If you have a substantial net worth later in life paying for a prenup is no big deal. I fired 6 years ago, met my now wife 3 years into fire. My net worth was 8 figures, hers very low 6 figures. We discussed up front, hard talk for sure, but it’s the only prudent thing to do. I was fair and had a sunset clause after 20 years it expires. Basically you are a dummy if you don’t. Get independent lawyers, you can gift the money to your spouse for their Independent console. Total peace of mind! If they aren’t willing to sign a prenup when there is substantial difference in net worth that’s a red flag, it’s also a sign of problems if you aren’t able to talk about money candidly.

      1. I agree with you, Ol1970. However, my partner and I – both previously divorced, over 60, with 1M+ in assets each – decided to put rings on our fingers and live as married, without the marriage certificate. Therefore, we need no prenup, here in California. The adult kids on both sides don’t have to worry about who gets what – I own the house we live in, and he owns the business we work in, plus some land. We have our separate 401k’s. Simple solution for us, although I understand that living as married without the certificate or religious support is not for everyone.

  13. This article resonates with me – wish I had read it 5 years ago. After 25 plus years I divorced. As a woman I was, perhaps anomalously, the breadwinner – money, debt, and how we envisioned our future retirement lifestyle were some of the primary reasons why we divorced. We amicably divorced and I am 100% debt free – kids are all successfully launched and I was able to pursue career and opportunities that my ex was unwilling to support. I left money on the table, but in the slightly less than short run- i am actually in a better situation financially and personally. Traveling extensively and living well within my means. Still looking to retire “early” – just not quite as early as my millennial children.

    1. Sara,

      Interesting insights and consistent with Abe’s comment above. There are situations where divorce probably is the best decision for both parties in the long run, but it almost always will come with short-term hardships.

      Best wishes,

  14. Medical divorce may play into the elder stats? Faithfully married couples come to the realization that long term care could bankrupt the surviving spouse. The happily married couple may realize late in life because of change of health or family history that Medicaid may be needed as finial support. Michigan has a 5 year clawback period. It would be nice to stymie the state efforts to recoup any losses from nursing home care after the surviving spouse passes for family inheritance. The state will require assets be drained before Medicaid will be available. The exception being house and car and modest living cost allowance. I have some friends and relatives that had experienced the horrific cost. One was lucky to have long term care insurance that is no longer available. The policy was purchased decades ago when there was good value to them. One brother in law had suffered logging accident and bond to wheelchair. He was wealthy, yet surviving spouse will have little to live on given his old age nursing home expenses were north of $100k per year and for many years. My FIL had a nice house yet with lawyer help was able to negotiate Medicaid care. The surviving spouse had low cost living expenses with family assistance. We utilized her house sale to support her present assisted living requirements. She is 92 today and about half way through the money. Were a little nervous of that given, I bet we will need to support her if her health holds up. Assisted living is not covered by Medicaid.

    1. Interesting insights Forrest. There are definitely financial incentives and penalties built into the tax code and other laws. This is a tough scenario that definitely hurts older married couples.

  15. Not long before retiring I inherited a million dollars. That’s not considered community property normally but I put it into a joint account immediately making it equally owned by both of us. If my wife wanted to leave I wanted her to be financially independent. She is my equal partner so that’s only fair. That was five years ago and I’ve never doubted the decision.

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