House vs. Pension

THINK TWICE BEFORE TRADING AWAY YOUR COMMUNITY PROPERTY RIGHTS TO HIS RETIREMENT PLAN FOR THE HOUSE. My articles are usually gender neutral, but this article is an exception. It is primarily written for women going through a divorce and addresses one of the most important choices they may be faced with making.

The headline was striking: Becoming a bag lady is feared by nearly half of U.S. women.

According to a recent poll by Allianz Life Insurance Company of North America, 49% of U.S. women fear becoming a bag lady—a homeless woman who wanders the streets lugging her meager belongings in a shopping bag or cart.

This fear may be unjustified due to the gains made by U.S. women in the workforce. However, it does bring to light that women—even those earning six figure incomes with generous benefits—have deep-seated financial fears. For women who have not worked or have limited work experience and skills, the fear is certainly justified. This is one of the main reasons I advise women going through a divorce to think twice about giving up their community property interest in their husband’s retirement plans, especially defined benefit pension plans, in exchange for the family residence.

The family residence comes with monthly obligations. The mortgage, insurance, property taxes and utilities are just some of the expenses. Even without a mortgage, the house can be financially draining. Consider plumbing repairs, heating and air condition repairs or replacement, roofing repairs or replacement, painting, repairing or replacing appliances, landscaping, etc. These will all occur during the course of home ownership. On the other hand, renters need only pick up the phone and call the landlord for repairs, a new dishwasher, etc. The boom line: You need enough cash flow to maintain the home you just traded for your community property interest in the pension.

The problem is that many women develop an emotional attachment to the house because that is where their children grew up or are still growing up. That is the place, especially for a full-time homemaker, that is their emotional foundation.

Women need to be prepared to give that up. As we saw in 2008, there is no guarantee that your house will appreciate in value forever. Even when you sell your house, the money you receive may not provide you a guaranteed monthly income such as a pension.

You’d like to earn 5% interest at the bank, but that isn’t going to happen in the era of low interest rates that currently exists. If you are nearing retirement age and going through a divorce, you need cash flow. Trading your community property interest in your spouse’s pension and/or other retirement plans for the house may trap you into an asset that you can’t afford. Instead of taking the house, consider the cash flow you will receive from your community property share of retirement accounts. If the house has equity, consider selling the house and putting your community property share into an income producing asset.

Having some cash at the ready, even in a low interest rate environment, isn’t a bad idea. Besides, you’ll probably sleep better at night knowing you have a cash reserve instead of trying to figure out how you are going pay to fix the roof. Finally, don’t assume that you will get by on spousal support from your ex spouse. Why? Because if your ex-spouse is also nearing retirement age, your spousal support may end or be severely reduced. In California, persons are not required to work beyond age 65 to pay current or future spousal support obligations.

If you decide to take your community property share of retirement funds instead of trading them for the house, make sure your divorce attorney is knowledgeable with respect to pension issues and brings aboard a pension expert to determine the best method of protecting your community property pension rights to your spouses’ retirement plan(s).