Divorce affects retirement standard of living

Divorce is a messy, costly business—and it can damage both spouses financially for far longer than the immediate period surrounding their split from one another.

Such is among the findings of a brief from the Center for Retirement Research at Boston College, which also highlights how broad the problem can be—with approximately 40 percent of marriages ending in divorce. Although the rate is no longer on the increase, that’s still a huge chunk of the population to face the financial woes that come along with the emotional ones.

Among the financial costs involved in divorce are legal fees, the need to dispose of illiquid assets and the hefty costs of maintaining two households rather than one. But those aren’t the only costs involved.

The report points out that having to sell illiquid assets at a bad time also means that the price gotten for those assets can be less than the assets are worth—not to mention the fees involved in the transaction itself.

Splitting the assets in a defined benefit plan also results in loss of wealth for a spouse who would have received more money had the marriage stayed intact until the earner’s retirement, when “earnings and accruals are at their peak.”

Tax brackets change with divorce, which means that any smoothing out of uneven income levels between spouses under the rules for married couples is lost. And while the custodial spouse will face higher child care costs, the other spouse will often be paying not just financial support to his or her former spouse and children, but will also be paying for a new family—or at least for his or her own household.

In addition, lines of credit can be reduced, which can cut access to mortgage markets for both spouses—and in addition take a greater toll on the lower-income individual.

According to the National Retirement Risk Index, which uses data from the Survey of Consumer Finances that indicates that both wealth and earnings are lower for households with a previous divorce than for those without one, 53 percent of households that have gone through a divorce are at risk in retirement compared to 48 percent for households without a divorce.

However, controlling for other factors, such as the age at which divorce occurs, the overall impact of divorce on being at risk is 7 percentage points rather than 5—and all households aren’t equally affected in other ways. Couples with a previously divorced spouse are associated with an additional 9-percentage-point increase in the NRRI and single men with a 6-percentage-point increase, while the impact on single women is not statistically significant.

Why is that one group in particular apparently unaffected? Says the report, “On the one hand, divorced women are more likely to have children, and children represent a financial responsibility that reduces the ability to save for retirement. On the other hand, divorced single women are more likely than those not divorced to own a house—an asset that serves as a base for a reverse mortgage in the NRRI, thereby enhancing retirement resources.” The two seem to balance each other out.