Often middle-age divorces can shatter the most well-thought-out retirement plans. The value of all assets at the date of separation, including pensions, RRSPs over $100,000, and any primary residence has to be split.Visual Generation/iStockPhoto / Getty Images
When Mike Fin got divorced in his late 30s, he had to sell his house in a suburb near Toronto and divide the proceeds. Usually, considering the high housing values in the Greater Toronto Area, that would throw most people’s retirement plans into a tailspin. But for Mr. Fin it made planning his retirement easier, not harder.
“I was house rich, cash poor and I was living beyond my means,” he said. “The divorce forced me to sell the house, yes – I had to divide the assets, but at the end of the day I have greater financial control over my own destiny.”
Ten years later, the 48-year-old now lives in a much more affordable condo unit that still has enough space for his two teenage children when they stay with him. And with reduced housing costs, Mr. Fin was able to invest more money for retirement. His divorce was amicable. “She is a great ex-wife,” he said. “I told her from the get-go ‘Either we get along or the lawyers get everything.’”
More often though, middle-age divorces can shatter the most well-thought-out retirement plans. Canadians in their 40s and 50s often still have a hefty mortgage and expenses like saving for their children’s education and paying for extracurricular activities. Splitting assets at this juncture and going from a couple who are sharing expenses to each supporting an individual household can throw a wrench into the most well-calibrated financial plans.
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Add it all up, and it becomes very difficult to catch up to your retirement goals, said Barry Nussbaum, a family law attorney at Nussbaum Law in Toronto.
“It would usually require you to, if you’re able to, work many more hours, or get a higher paying job and make up for it,” Mr. Nussbaum said. “But it’s extremely difficult to make up the years, versus someone who separates when they’re 25 and lost two years of joint income versus someone at 45 or 55, when they have an RRSP that now has to be shared.”
The value of all assets at the date of separation, including pensions, RRSPs over $100,000, and any primary residence has to be split. Divorcees don’t have to actually break an RRSP or liquidate a pension, but you have to add up what everything is worth.
While assets are often divided in half, it can also depend on the length of the marriage, individual preferences and how well they negotiate. Usually the settlement is reached by selling the house or another large investment.
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David Ber of Vaughan, Ont., also got divorced in his late 30s, but the event didn’t affect his RRSP directly, since his wife had a similar amount stashed away. He runs a small business so has no pension. He owned a house with his ex-wife but, like Mr. Fin, he didn’t consider that part of his retirement planning and prefers to invest his money in his registered accounts.
“I don’t view house equity as a retirement plan at all,” Mr. Ber said. “I view it as a place to live … it’s better to rely on your own money you can raise yourself than have it all in one place.”
His ex-wife stayed in the house and paid him out for his share. Unfortunately, the equity was heavily reduced because so much money, hundreds of thousands by the end, had gone to pay lawyers because the divorce was so contentious.
It was difficult for him to re-enter the housing market – when he first got married around 2006 starter houses were around $350,000 in the area of the Greater Toronto Area in which he lives. But when he was ready to get back on the property ladder with his new wife, 12 years later, an average three-bedroom house was closer to $1-million.
With the support of his family he was able to get back on his feet again and achieve the same lifestyle he had during his first marriage, but it took years and retirement planning was a secondary priority.
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“Generally, if you’re the breadwinner for most of the marriage, or all of the marriage, you basically have to split your salary or income more than half and that leaves you next to nothing to live with,” Mr. Ber said.
While it’s difficult for the breadwinner, to pay out such a large sum, the split is also difficult in another way for the lower-income-earning partner. For many families, that’s the spouse – often women – who has taken time off work to take care of kids and household tasks. Even though that person is usually entitled to half the assets and spousal support for a certain number of years to help them ease back into the work force, the years without a full-time job would likely heavily affect their earning potential.
Kurt Rosentreter, a certified financial planner, doesn’t mince words when he describes the effect a midlife divorce can have on retirement planning.
“You just lost 15-20 years of savings time you’ve given to your ex that you don’t have that time to replace,” Mr. Rosentreter said. ”So I don’t even think it’s dramatic to say you’re going to be delayed in your retirement or you’re going to be living on a lot less than you hope.”