Divorce Negatively Impacts People’s Retirement Readiness

Divorce is very costly to individuals and, in most cases, reduces people’s retirement readiness, according to the Center for Retirement Research at Boston College. The center’s National Retirement Risk Index (NRRI) found that 53% of households that have gone through a divorce are at financial risk in retirement, compared with 48% of households that have not experienced a divorce.

Further, the net financial wealth of non-divorced households is $132,000, about 30% higher than the $101,000 held by divorced households. The center says that, overall, divorce raises the possibility of being at risk by 7 percentage points. For couples with a previously divorced spouse, the risk is raised by 9 percentage points.

For divorced single men, it is a 6-percentage-point increase, but for divorced single women, the impact is not statistically significant. The center says the reason why it may not be significant is because divorced single women are more likely to own a house, which they can use for a reverse mortgage.

Other costly effects of a divorce, the center says, include short-term legal fees. Divorce also frequently results in the sale of the house, which not only involves transaction costs but also can occur at a suboptimal time in the housing market.

Frequently, divorce requires that financial and retirement wealth be divided between two new households. If financial assets can be divided without being sold, divorce may not reduce total wealth. But if assets are sold, the timing may be bad and sales can involve transaction costs.

Divorce also increases daily living expenses because the divorced couple now occupy two households. They also lose the federal income tax break that married couples receive. In addition, divorced women often have children to look after, which can impede their ability to earn a living. And divorced men often are required to provide financial support to their ex-spouse while also paying the bills for a new family.

Finally, the line of credit for former spouses may be reduced, thereby reducing their access to mortgages.