Ending a marriage after many years brings financial challenges. This is especially true when retirement is near. For those who spent years managing a household, protecting your money becomes critical. Here are four costly mistakes to avoid during a gray divorce.
Accepting an unequal split of retirement accounts
California follows community property laws. This means assets gained during marriage are usually divided equally. However, retirement accounts need careful handling. Withdrawals from retirement accounts face income taxes. This can reduce their actual value. One spouse may walk away with less than their fair share.
Splitting employer-sponsored retirement accounts like 401(k)s and pensions requires a Qualified Domestic Relations Order (QDRO). This tells the plan how to split the funds. Without it, these accounts cannot be divided. Individual Retirement Accounts (IRAs) can be split using the divorce decree.
Overlooking spousal pension rights
Many long-term marriages involve one spouse with a large pension. Under California law, the portion earned during marriage is community property. Some spouses mistakenly give up their rights to ongoing pension payments for other assets.
If the assets run out, the lifetime pension may be worth much more. Understand the full value of your pension before making trade-offs.
Underestimating healthcare costs
Losing a spouse’s health insurance can create a financial crisis. This is especially true for those under age 65 who may not yet qualify for Medicare. The Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage extends benefits for a short time. However, it comes with high premiums.
For homemakers who spent years outside the workforce, getting affordable healthcare until Medicare takes careful planning. Medical costs can quickly drain retirement savings if this transition period is not addressed.
Failing to update beneficiary designations
Retirement accounts, life insurance policies and bank accounts often have beneficiary designations. These are separate from divorce papers. California law automatically revokes an ex-spouse as beneficiary on assets like bank accounts and IRAs after a final divorce.
However, this does not apply to life insurance policies or employer-sponsored plans like 401(k)s. These must be updated manually. Without updating these forms, life insurance money or retirement funds could go to an ex-spouse.
Protecting your retirement
Financial decisions during a gray divorce can affect the next 20 to 30 years. Carefully reviewing assets and retirement accounts can help protect your financial future. Consider seeking legal counsel to discuss strategies during this transition. Taking these steps now can help you build a secure retirement.
