What Happens to My Retirement Assets in the Event of a Divorce

A document known as a Qualified Domestic Relations Order (QDRO), which is a part of a divorce settlement, specifies how retirement assets are divided. A QDRO specifies the amount or portion of a plan participant's benefits that are paid to a spouse, former spouse, child or other party. A QDRO typically governs assets within a retirement plan such as a pension, profit-sharing plan, or a tax-sheltered annuity. Benefits paid to a former spouse typically are considered income for tax purposes. If you contributed to your retirement plan, a prorated share of our investment is used to determine the taxable amount.

Former spouses on the receiving end of a lump-sum distribution mandated by a QDRO may be able to roll over the money tax free to a traditional individual retirement account or to another qualified retirement plan. Following such a transfer, assets within the plan are subject to rules that would normally apply to the retirement plan. If you transfer assets within a traditional IRA to your spouse as part of a divorce decree, the transfer is not considered taxable and the assets are treated as your former spouse's IRA.

Procedural Issues
QDROs are governed by rules established by the US Department of Labor. In most instances, a judge must formally issue a judgement or approve a settlement agreement before it is considered a QDRO. The fact that you and your soon-to-be-former spouse have signed an agreement is not adequate for a QDRO to take effect. Also, following an order issued by a judge, the administrator of the retirement plan affect by the QDRO must determine whether the court order qualifies as a QDRO according to the rules of the labor department.

Note that retirement assets are part of a broader financial picture that may include your home, taxable investments, personal property, and other assets. It is not mandated that your spouse receive a portion of your retirement assets while granting other assets to your spouse. In addition, a prenuptial agreement, depending on its provisions could potentially limit your spouse's rights to your assets. You may want to consult a divorce lawyer and your advisor to determine whether federal laws relating to retirement accounts apply to your situation.

How Much You Need to Save for Retirement

How much money does a typical worker need to save every month in order to have a reasonable chance of financing a secure retirement? New analysis from the Center for Retirement Research at Boston College (CRR) came up with a broad overview of the rates needed by different age groups and income levels.

To estimate necessary savings rates, the researchers first sought to determine what level of retirement income would provide an equivalent standard of living to a retiree's final year of pre-retirement income. After they took account of changes in various tax burdens, commuting expenses, housing costs and other factors, they estimated that a single worker earning $20,000 prior to retirement (the CRR study's "low" income) would need about 88% or $17,600 during retirement, including Social Security benefits calculated according to the current formula. Someone earning $50,000 ("medium" income) would need about 90% or $40,000 after retirement, and someone earning $90,000 ("high" income) would need about 81% or $73,000. Both of those estimates also assume the current levels of Social Security benefits. 

Here's how the projected savings rates work out for a consumer at each level, assuming a normal retirement age (67) and an average annual investment return of 4% after inflation is taken into account:

A low income retirement saver would need to set aside 8% of income each years starting at age 25. If the same person were to wait until age 35 to start, the rate would go up to 12% of their income per year. If the same person were to wait until age 45, the necessary savings rate would rise to 20% per year.

A medium income retirement saver starting at age 25 would need to set aside 12% per year. Waiting to start until age 35 to start the savings boosts the rate to 18%. Waiting until 45 pushes it to 31%.

A high earnings saver would have to set aside 16% per year starting at age 25. If he or she waited to start until age 35, the rate would increase to 25%. Waiting until 45 causes the required savings rate to rise to 42%.

Keep in mind that if Social Security were to be cut back, savings rates would have to be increased proportionately to cover any reductions in anticipated benefits. Also keep in mind that if real investment returns average higher than 4% in the future, the amount of savings can be reduced somewhat. But the researchers noted that "...the effect of rate of return on required saving rates, for workers at all earning levels, is smaller than the effect of the age at which saving starts and, especially, the age of retirement." In other words, start your savings program earlier and then working longer could have the greatest impacts on your financial readiness for retirement.

Bad Choices Get Rewarded

It can be really hard to behave correctly if we see examples of people being successful while doing things we know have higher odds of a bad outcome (e.g., buying lottery tickets). But as you’ve probably learned by now, investing isn’t always fair. Bad choices get rewarded, while people who made prudent decisions sometimes appear to be punished—at least in the short run.

So even though it’s tempting, I strongly encourage you to judge the investment advice you receive based on the validity of the principle (process) and not the outcome. Let me share a story about a friend who had stock in his grandmother’s mining company. Over time, the family had invested and lost millions trying to keep the business afloat. As you might imagine, the family stories around the business made it seem like a sacred thing to protect, regardless of the cost.

At this point, the stock had reached a low of $2 a share and my friend didn’t know what to do. He worried that if he sold the stock, then it might recover and his family would regret the sale and wish they’d kept it. I acknowledged that if he sold the stock and it doubled or tripled—which was a real possibility—he’d feel badly. But the catch was that if he kept the stock and it went to zero, he’d feel much, much worse.

The underlying factor was that he needed to make a decision based on a principle (e.g., did owning this stock support his long-term goals?) instead of the emotion and family lore surrounding the stock. There’s no guarantee that good investment decisions won’t lead to a painful result. But we need to remain committed to making good decisions based on sound principles and not just luck or emotions.

This article is written by one of our senior advisors, Robert W. Hanson Jr., CFP, MS. Bob is a graduate of DePaul University's College of Commerce, and is a board Certified Financial Planner, (CFP).  He also found time to earn a Masters of Science Degree in Financial Services from the College for Financial Planning in 2003.  Bob has also taught investments at Northwestern University to students in the school for Continuing Studies.

A Primer on Medicare and Medigap Coverage

Despite all the public discussion about health care, very few people under the age of 65 understand the basics of Medicare, the federal health program for seniors and certain disabled individuals, or Medigap, the supplemental private coverage many buy to cover treatment that shortfalls what the federal program doesn't pay.

Even if you have years before you qualify, why focus on Medicare and Medigap now? Because as big changes happen in our healthcare system, those who understand the programs and products ahead of time will not only be better equipped to plan for their post-retirement healthcare options, but they'll have a better understanding of these critical federal programs change over time.

A visit with your Vermillion Financial Advisor can give a broader view of what the federal government will and won't pay and how you should plan your coverage going forward.

Here's a summary:

Who is eligible for Medicare?  More people than you might think believe Medicare is available to anyone over the age of 65 qualify under certain circumstances, including: if they are permanently disabled and have received Social Security disability payments for the last two years, or if they need a kidney transplant, are under dialysis for kidney failure or have Amyotrophic Lateral Sclerosis also known as Lou Gehrig's disease.

How does Medicare cover expenses? Medicare coverage is divided into three primary parts: Part A, Part B, and Part D. And yes,there is a Part C. Here's what each part covers:

• Part A is the segment of the program most associated with hospital care. It covers hospital inpatient care, a limited amount of care at some skilled nursing facilities, and some specific home health care alternatives and hospice care. Most people are enrolled automatically in Part A when they reach 65 and they get this coverage for free. What's important is that Medicare doesn't cover long-term nursing home expenses, so that's why long-term care planning is necessary for all individuals. 
• Part B is all about outpatient services. This is the part of the plan that covers doctors' visits, outpatient care and some other medical services that Part A doesn't cover, such as the services of physical and occupational therapists, and other aspects of the home health care. You do have to pay a monthly premium for Part B coverage with a deductible - in 2012, the basic premium is $99.90 per month though it might be higher for some people based on income.  By the way, you'll sometimes hear people refer to Part A and Part B coverage as "Original Medicare".
• Part D is Medicare's prescription drug coverage. Part D is administered by a number of private insurance companies that operate in various areas of the country, so this requires some shopping on your part to make sure you're getting the right drugs at the right price. Financial assistance might be available if you need it.
• Part C is actually the Medicare Advantage Plan, which is an optional plan individuals may choose so they receive their Medicare benefits through private health plans. You'll also hear this plan referred to as Medicare+Choice. These private plans include conventional HMO's and PPO's and are required by law to offer benefits that cover everything that Medicare covers, but they don't have to cover everything exactly as Medicare Part A and B do. There might be some customized options that allow for lower co payments or lower total out-of-pocket expenses. In simplest language, Medicare Advantage plans blend the benefits of Original Medicare and Medigap plans (more on this below). By law, you can't buy Medigap supplemental insurance if you've chose Medicare Advantage. However, it's very important to get some expertise on the choice between Original Medicare and Medicare Advantage plans based on your anticipated health needs to make sure the coverage you buy covers what you really need.

What about Medigap? So-called "Medigap" coverage is supplemental coverage that's available for people who opt out to be covered under Original Medicare -- Part A and B coverage. You buy Medigap insurance from a private insurer, and your primary goal is to determine whether that supplementary coverage actually pays for the things you know you'll need that Medicare doesn't cover. You do have to pay a monthly premium for this coverage. And again, if you choose Medicare Advantage (Part C) coverage, you're not allowed to buy Medigap coverage.

To compare Medicare and Medigap coverage, visit the Medicare Personal Plan Finder on the Medicare.gov  website.

When do I enroll for Medicare? You have a six-month window to enroll for Medicare that starts three months before your 65th birthday and ends three months after. As mentioned above, if you're already receiving Social Security at age 65, you'll automatically be enrolled in Part A, but if not and you enroll more than three moths after your 65th birthday, you may be subject to a late enrollment penalty.

By the way, what's Medicaid? This is the name for the federal program -- and corresponding state programs -- that pick up healthcare costs for indigent children and adults. Unless you're below the poverty line or you spend out your assets in your senior years, this won't be part of the discussion.