Debt and Retirement: How to Protect Yourself in a Later-in-Life Divorce

When a couple who has been married for many years decides to divorce, the financial burdens are different than they are for younger couples – but that does not mean they are lesser burdens. In a “gray divorce,” you may not have to worry about things like child custody, child support, and education, but you may find yourself worrying about retirement, and how personal debts may affect your ability to retire when, where, and how you like.

MarketWatch offers a lot of information about finances, including stock market data and business analysis. They also run a popular advice column called “Help Me Retire,” where readers can submit questions and concerns about how to plan for retirement. In a recent column, a reader (age 63) submitted that she was recently divorced after 23 years of marriage. She planned on retiring in March 2025, but because of the divorce, she now has “$100,000 in unsecured consumer debt and another $30,000 in student loans, and about $170,000 in my 401(k).” The column went on to address her options regarding retirement.

How much debt do Americans really have?

What caught our eye about this column wasn’t that the woman had an exceptionally large amount of debt; it was that, in many cases, this amount of debt is normal. Between credit cards, mortgages, home equity loans, higher education expenses, and car payments, American households carry huge amounts of debt. Per debt.org, “the typical American household now carries an average debt of $145,000,” and the average American has more than $90,000 in debt.

How are debts divided in a divorce?

When you get divorced in North Carolina, your debts, like your assets, are classified in three different ways:

1. Separate, meaning they belong to you and you alone;
2. Marital, meaning they are subject to equitable division; and
3. Divisible, which are accrued in the period between the first day of separate through the finalization of your divorce.

If, as a couple, you choose to pay off debt before divorce, or to transfer retirement money between you, then one option is to use your retirement accounts to reduce or eliminate the debt, or to move money between you. However, there are drawbacks to this approach. Not only will you have less money in your retirement accounts, but you may be responsible for penalties associated with early withdrawal, and if you have a 401(k), you will be responsible for the associated taxes. It is a better idea to talk with your respective attorneys to see if there are other ways to handle debts before the divorce is final.

How to keep your retirement accounts in a divorce

They say an ounce of prevention is worth a pound of cure, and when it comes to your money, they are right. The best way to protect your assets is the creation of a premarital agreement, which will outline where your assets go, and could potentially address debts, as well. Premarital agreements are smart tools for couple entering their second marriage, as both parties have accumulated assets and debts throughout their lives.

If you do not have a premarital or postmarital agreement in place, and you and your spouse are dividing retirement assets, you will likely need a Qualified Domestic Relations Order, or QDRO. This order allows a couple to split certain types of accounts without incurring penalties (though you may still have to pay taxes, depending on the type of account that is split). The “tricky” part about QDROs is determining their value because they may gain or lose money between the time you separate and the time you officially divorce, which is why you really need an attorney to help you handle the details that go before the judge.

Or, if you are your spouse are amenable, you can decide that one person will keep the retirement accounts in exchange for something else of value. For example, one spouse may keep the retirement account, and the other may take the family home. Or one spouse may retain all rights to a pension, whereas the other spouse receives the 401(k). You have a lot of room to maneuver in this regard. Barring any truly fantastic discrepancies, most courts will allow couples to split their assets however they see fit, choosing to intervene only when there is a gross imbalance.

Finally, when all is said and done and the divorce is final, here are three things you can do to address the debts you have while still planning for your retirement:

1. Work with a financial advisor. Our attorneys regularly work with a team of experts, such as financial advisors, as we represent people during a divorce. You should continue working with an advisor who can help you set realistic goals and understand what you may have to do to reduce or eliminate your debt and retire comfortably.
2. Consider downsizing. It can be hard to consider a different life after a divorce, when it all still feels a bit raw. But downsizing may be a better option. Moving into a 55+ community, for example, means you never have to worry about your lawn again – but it also means you can drop your gym membership, take advantage of public transportation to shops, and work on your slice without paying greens fees. Those little costs add up, and you can put that “found” money directly into a retirement account.
3. Be smart about consumer credit. If you still have credit card debts, look for cards offering zero-interest balance transfers (provided you can pay it all back in the 12–18-month window they usually offer) and cash back perks. Frequent flier miles are a nice advantage if you plan to travel during retirement and can plan trips during less busy times.

At Epperson Law Group, PLLC, we have helped countless clients through the divorce process, and can explain how your retirement could be affected by your debts. Our Charlotte divorce attorneys are prepared to assist you at every stage, and can help you find the resources you need to address your debts, tax ramifications, and retirement plans when your divorce is final. To reserve a consultation in our Charlotte, Boone, Concord, or Weddington office, call 704-321-0031, or fill out our contact page.