Before his divorce, Chris Andreasen felt on track for retirement. He’d been making regular contributions to his 401(k) and managing debt effectively. His retirement wellness score was in the 90s.
The then-47-year-old advertising manager from Des Moines, Iowa, saw himself retiring at age 63 to travel and play video games with his grandchildren.
But when a divorce settlement halved his 401(k) balance, he knew he had to change his plan—and find the energy to rebuild.
What happens to retirement savings in a divorce settlement?
When Andreasen began negotiating his divorce settlement, he was shocked to find that his 401(k) could be part of it.
The law in his state considers retirement accounts marital property, which required him to split the amount with his ex-wife. Though she was working, her employer didn't offer a retirement plan, and she hadn't started her own yet. “We were planning to live together off my retirement and pension and share our accumulated savings,” Andreasen says.
In a divorce proceeding, retirement plans require a qualified domestic relations order (QDRO) to split a 401(k). A QDRO is separate from the divorce agreement, and it allows the funds to be moved without the typical 10% early-withdrawal penalty.
“Readjusting to your new normal as a single individual can be difficult following a divorce. Revisit your saving and spending habits, your budget, and your goals.”
Heather Winston, assistant director of financial advice and planning
Find your new financial reality.
“The analytical part of me didn’t really see how rebuilding was going to be realistic,” Andreasen says. “You're no longer adding to what's already saved, you're trying to rebuild what was lost. It seemed like an almost impossible task to reaccumulate the amount I’d lost in the next 15 years.”
If it all feels overwhelming, that’s likely because it is. “Extend yourself some grace as you move through this time. Divorce is psychologically draining, and it gets even more challenging when there’s money involved,” says Heather Winston, assistant director of financial advice and planning at Principal®. It may take six months or more after a divorce to get a handle on your new financial situation, she adds.
During that time:
- Reshape your budget for your new living situation and personal priorities, accommodating any legal bills from the divorce. “A lot of times, people either spend money they no longer have or they cut back dramatically. The key here is to be practical for your circumstances,” says Winston.
- Adjust your beneficiaries, your will, and any powers of attorney to suit your new reality.
- Build a financial safety net. Once you feel like you’re settled, check your savings and adjust your paycheck to start rebuilding your emergency fund.
- Examine your tolerance for risk. Your risk tolerance (how much volatility you’re comfortable with) doesn’t really change throughout your life. What does sway, however, is something called risk composure. This is where short-term emotions can override your tolerance for risk. With investments, more risk may mean the potential for higher returns, but it also means a greater chance for bigger losses if there’s a market downturn. So Winston suggests pausing to consider if your pre-divorce asset allocation remains appropriate given the emotions you may be feeling.
- Get help if you need it. Winston suggests finding or reconnecting with a financial professional at the time of separation. They can help you look at your financial picture holistically and assist in setting priorities for saving, spending, and preparing for retirement.
Then, adjust your contributions to begin rebuilding.
The amount you contribute to your retirement savings is one of the major levers you can use to rebuild your balance. “You can’t control the markets,” Winston says, “but you can control how much you’re putting into your retirement. If you’re in a retirement plan with an employer match, you can contribute enough to maximize that match or gradually increase your contributions to meet a goal.”
“You can't control the markets, but you can control how much you're putting into your retirement.”
Heather Winston
However, there can be some hurdles to retirement contributions. Even though you’ve lost a big portion of your balance, you’re subject to the annual IRS maximum contribution limits and any restrictions from your plan.*
| Account | 2021 contribution limit | 2021 catch-up limit (if you’re 50+) |
|---|---|---|
| Employer-sponsored plans: 401(k), 403(b), 457 plans, thrift savings plan |
2021 contribution limit
$19,500 |
2021 catch-up limit (if you’re 50+)
$6,500 |
| Individual retirement account (IRA) |
2021 contribution limit
$6,000 |
2021 catch-up limit (if you’re 50+)
$1,000 |
| Roth IRA |
2021 contribution limit
$6,000 |
2021 catch-up limit (if you’re 50+)
$1,000 |
Adjust your expectations.
After his divorce, Andreasen reassessed when he’d retire and what retirement would look like. “I’m now shooting for age 65, but there’s likely going to be a scenario where I work to make ends meet.” He’s OK with working in retirement. More than half of people do.
“We all have the opportunity to maximize what our retirement years look and feel like,” says Winston. “In fact, whether you volunteer with your favorite charities or take a part-time role doing something you enjoy, your early retirement years can be an opportunity to continue making valuable contributions and connections with others.”
What to do next?
- Have a retirement account from your employer with services through Principal®? Log in to make sure you’re maximizing your employer contribution. First time logging in? Get started.
- Got a financial professional? They can help you figure out your financial picture after a divorce. Check with your HR department or employer to see if your company’s retirement savings plan offers this service. Or, we can help you find one.