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Now and later: How does divorce impact retirement?

Building a sufficient nest egg for retirement is a significant challenge for most people, regardless of marital status.

There is no doubt, however, that getting divorced is a financial hit that adds to these challenges.

How does getting divorce affect net worth and the prospects for retirement? And are these effects generally greater for one gender more than the other?

Tradition retirement plans vs. 401(k)s

Of course, there are plenty of factors besides divorce that impact retirement savings. A major factor in American life in recent decades has been the switch from traditional pensions to 401(k)s and other defined-contribution plans.

With a traditional pension, a worker could generally count on getting a certain percentage of his or her previous income in retirement. This is called a "defined benefit" plan.

Today, however, a much more common arrangement is a 401(k) or similar plan that is essentially a stake in the stock market. These plans leave the responsibility to invest and safe enough to live on in retirement to the individual worker.

The risk of running out of money in retirement

Because the ultimate yield from a 401(k) is uncertain, it may not position you for retirement as well as a traditional pension might have. Moreover, many people don't even have a 401(k) at work, perhaps because they work as independent contractors or consultants.

There is also the fact that many people in their 50s and 60s have experienced various layoffs and downsizings that have impacted their ability to save for retirement. The Great Recession officially ended in 2009, but is after-effects linger - especially as older Baby Boomers retire or prepare for retirement.

For people in this demographic, the risk of running out of money in retirement is real.

The effect of divorce

In short, people these days face many challenges when trying to save enough for retirement. When divorce is added to the mix, it can make things even more difficult.

Financial planners have long been aware that divorce can have a negative impact on economic well being in retirement. In a sense, it's simple math. Dividing the pie in two leaves less for both - at a time when the cost of maintaining two households is adding to the expense column.

To be sure, you could remarry and potentially get a financial infusion from a new spouse. But researchers have clearly established that divorced people generally can expect lower retirement income than similarly situated people who are still married.

Why does this affect women more than men? It's because women generally have less money in retirement plans. Even if a couple's retirement accounts are divided fairly, the ex-wife often has fewer job skills to fall back on. The result is a striking gender difference: women on average make a lot less than men in retirement.

How much less? More than $10,000 per year.

Protecting your interests

Given the negative impact that divorce can have on retirement, it is especially important to protect your interests when dividing retirement accounts. Your case may involve a procedural tool called a qualified domestic relations order (QDRO) or it may not. Either way, it is critical to get knowledgeable counsel.

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