Retirement savings are a collaborative effort, even in divorce

Whether you are divorcing via litigation, mediation or collaborative divorce, you need to divorce yourself from this thought: Your retirement savings are not a marital asset. Truth be told, your retirement savings are a marital asset—just like your home, bank accounts, etc.–and will be part of any divorce settlement you and your spouse strike. In fact, for many people their retirement savings are their largest marital assets after their home.  So whether you are the one who has been paying into the 401(k) or pension fund at your job or you are the nonworking spouse who has little or no retirement savings, it’s all on the table in your divorce.

Before you can divide your retirement funds, you have to value them.  Now, in the case of an IRA or 40l(k), it is pretty straightforward—the value of the retirement fund is reported on the monthly, quarterly or annual statements that you receive. It is when you have to value a pension that things can become more complex.

If you do receive a statement from your pension fund, it probably only reports your contributions to the pension.  But once a pension becomes vested, the value is a combination of your contributions and your employer’s contributions once you retire.

If you have a 401(k) and your employer matches your contributions, those matches are made at the same time that you make your contributions. So they show up on your statement. With a pension, however, the employers’ contributions for all of the employees are pooled.  The amount that you are entitled to is only determined when you retire, based on a number factors including your number of years of employment, your age at retirement and your salary at the time of retirement.

This means that in order to value a pension, it is necessary to make a number of assumptions with respect to date of retirement, age at retirement and salary at the time of retirement. In addition, after the basic retirement assumptions are made, you have to apply a discount to the value in order to determine the present value of a pension that will be moving into payment status at some point in the future. Needless to say, these types of calculations are well beyond the abilities of most people, including most attorneys. People who have pensions when they divorce usually will have to hire an expert to estimate the value.

Even after your retirement savings are valued there are still important considerations when deciding how to divide them. If one party is keeping more retirement funds and the other party is keeping either the marital home or other non-retirement investment accounts, you might want to factor in tax consequences. The person getting the retirement funds will only be able to access them after paying taxes and sometimes after paying an early withdrawal penalty.

When dividing pensions (as opposed to IRS or 401(k)s) issues such as survivor benefits, and the possibility of early withdrawals or disability should also be addressed.

Finally, in order to divide most retirement accounts you will need a special court order, usually called a Qualified Domestic Relations Order (QDRO) in order to transfer retirement accounts between spouses in a divorce without paying tax penalties.

So, you might ask whether it is better to divide retirement assets in a particular type of divorce—litigation, collaborative divorce, or mediation?  From my perspective, the answer is tied to the complexity of valuing and dividing retirement savings.  You are probably going to have to hire at least one expert, and possibly more, to value and divide the retirement funds. If you are going to offset retirement assets against non-retirement assets, you are going to add another level of complication.  If you are mediating your divorce this is one area where you should be sure to consult with your attorney.

If you are in collaborative divorce, you can work cooperatively by jointly hiring one expert rather than each party hiring their own. By it’s very nature, the process is collaborative. So you and your spouse are trying to work together to come up with a fair agreement. Part of that is hiring neutral, impartial experts to resolve potential differences. The cost for those experts—which can include an estate planner—is shared by the divorcing couple.  Because you are working with trained attorneys and experts you also have some flexibility or complexity in the agreement. So, instead of a straight 50-50 split, you can be a little creative (e.g. couples may agree that one party keeps his/her 401(k) while the other retains the family home).

When I work with clients, one of my first pieces of advice is let’s come up with a divorce agreement that you can live with five years from now as well as today. If retirement assets are a central part of the negotiation, you really are talking about an agreement you can live with for the rest of your life.  That is why it is important to do the ground work to understand and come up with a fair division of retirement savings.