Getting divorced has large negative effects on the retirement readiness of American households, but divorced women are generally no worse off than single women who have never married, a study published by the Center for Retirement Research at Boston College concluded.
The research brief, “How Does Divorce Affect Retirement Security?” by Alicia Munnell, Wenliang Hou, and Geoffrey T. Sanzenbacher, was published in June 2018. The authors investigated how divorce impacts the National Retirement Risk Index (NRRI), which is calculated by comparing households’ projected replacement rates—or retirement income as a percentage of pre-retirement income—with target replacement rates that would allow them to maintain their standard of living in retirement. These calculations are based on the Federal Reserve’s triennial Survey of Consumer Finances (SCF), which uses a nationally representative sample of U.S. households.
The authors observed that although the divorce rate is no longer rising, about 40% of marriages in the U.S. will end in divorce. The brief outlined the main types of financial setbacks couples typically experience when they divorce, including having to cover legal fees and other short-term expenses associated with the breakup; being forced to sell the family home, sometimes at a suboptimal time in the housing market; having to divide financial and retirement wealth between two new households, which may force the spouses to sell assets prematurely; and having to take on the cost of maintaining two households instead of one, which can increase living expenses and, in some cases, income taxes. The authors also noted that divorced women in particular may find it difficult to work and to save for retirement because they have child care responsibilities, while divorced men who are non-custodial parents may face problems saving because they have to cover child support and alimony payments.
Based on the assumption that these financial losses almost certainly inhibit each spouse’s ability to save for retirement, the study looked at the questions of how severely divorce affects retirement readiness, and how these effects vary by household type. Not surprisingly, the results showed that both wealth and earnings are lower for households with a previous divorce than for those with no history of divorce: the average net financial wealth of non-divorced households was found to be $132,000, or about 30% higher than the $101,000 held by divorced households.
The findings also indicated that this less favorable economic profile carries over to the NRRI, as 53% of households who have gone through a divorce were found to be at risk in retirement, compared to 48% of households with no history of divorce. After controlling for other factors like income group and age, the analysis showed that the share at risk is 7.3 percentage points higher for the divorced households than for the households with no previous divorce. To put this figure into perspective, researchers pointed out that the Great Recession increased the NRRI by nine percentage points, which suggests that the impact of divorce is large.
However, the analysis also found that not all household types are equally affected. The results revealed that compared to their non-divorced counterparts, married couples with a previously divorced spouse are 9.4% more likely to be at risk in retirement and divorced single men are 5.5% more likely to be at risk in retirement, but that divorced single women are not disadvantaged relative to non-divorced single women. To explain this lack of a difference in retirement readiness between divorced and single women, the authors observed that although divorced women are more likely than single women to have children, which can reduce their ability to save for retirement, they are also more likely to own a home.
From Benefit Trends Newsletter, Volume 61, Issue 7
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