Not all Pensions are Created Equal…

I recently got a call from a woman in the midst of a divorce who very wisely began asking a lot of questions about the pension she would be receiving payments from when her soon-to-be ex-spouse retired. We called the pension office together to review the language of the marriage settlement agreement (MSA) and draft Qualified Domestic Relations Order (QDRO) to find out what would happen if her ex-spouse passed away. We determined the language needed modification to prevent her pension payments from ending on his death. That would have been a serious surprise with significant impact of her lifestyle.

It’s very easy to think, “OK, we will split the marital portion of the pension in half, have someone create a QDRO to split the pension and go along our merry way.” Sounds good, but maybe not so easy. QDRO’s for pensions are not something you should try to do yourself, and truly a Pension QDRO should be written by a QDRO expert. QDRO’s require precise detailed legal language specific to the pension you are dividing. And they don’t happen automagically!

To start, it is not very exciting reading, but someone needs to read the pension documents and evaluate what is and is not possible. That probably should not be you, and probably not your attorney either. A Certified Divorce Financial Analyst (CDFA) is a good option for this role. A CDFA receives training in identifying pension related issues. Better yet, they can explain how they work, including the various options relevant to your situation.

Reading the pension document’s fine print can determine IF the pension is divisible. That fine print will also describe what happens when the pensioner or ex-spouse passes away and other similar pitfalls such as will the pension still pay the surviving party? And what about heirs? Another variable of the pension can be what happens if the pensioner gets remarried. Recognizing these possible pitfalls ahead of time allows for additional planning to prevent future unwelcome surprises.

As a CDFA, I was able to help my client project her future income streams and look at the various options to smooth out her income throughout the remainder of her life. To do this we looked at the pension options, her social security income, the social security income she will be eligible to receive from her spouse, and other income sources. She now has peace in knowing what her financial future looks like.

Am I Going to be OK? Divorce and Retirement

If you are divorcing and anywhere near retirement, your financial future is a very important consideration for your divorce settlement. As I work with clients, I make it a priority to at least have a conversation on the subject with everyone 45 and older. The level of detail for this conversation increases the closer the client is to 65 or his/her desired retirement age. AND it must happen BEFORE the settlement is final.

Divorce can wreak havoc on your retirement assets (401K, IRA, pension, etc.). Additionally, some people find it tempting to pull some of that retirement money out, regardless of penalties, but that should be a last resort. A common outcome is that each party in the divorce gets 50% of retirement assets in the settlement. The problem is that retirement expenses of a single person are not merely 50% of what they are for a married person.

This is a great example of how a Certified Financial Planner (CFP) who is also a Certified Divorce Financial Analyst (CDFA) can add value and provide peace of mind. In my work for soon-to-be-divorced soon-to-be retirees, I generate a retirement projection based on the proposed settlement. I prefer to start before the settlement is even drafted to make sure my client asks for what is wanted and needed. The projection takes into account income from employment, support, social security, pensions (if you are lucky enough to have one), and any other income you anticipate as well as likely expenses and future goals. This allows us to work together to paint a picture for your future.

It is an amazing experience to work with divorcing couples who respectfully work together to make sure both parties will be OK; however, that is not a reality for everyone. Even if the divorce is not going well, it is a powerful process for the party I’m working with.

I have to say, I actually enjoy this part because it helps people to start planning for life after the divorce and maybe even do a little dreaming for their future lives. A little spark of positive energy to move forward with less uncertainty and more peace of mind.