Is it Better to Keep the House or Retirement Funds in a Divorce?
For many couples, the family home is more than just a financial asset; it is a repository of memories and a symbol of stability. However, when a marriage ends particularly later in life, the decision to keep the house can become a financial trap. With “gray divorce” on the rise, older adults are increasingly facing a difficult choice that threatens their golden years, often asking is it better to keep the house or retirement funds in a divorce?
The stakes are higher than ever. Recent data reveals that 36% of people getting divorced are now aged 50 or older, a dramatic increase from just 8.7% in 1990. As these couples split their accumulated wealth, they often find that dividing a fixed income and a single nest egg into two separate households leaves both parties struggling to survive. While the emotional pull of the home is strong, the financial reality suggests that for many, keeping the retirement funds may be the safer bet.
The Financial Reality Behind Gray Divorce
The phenomenon known as “gray divorce” refers to the rising rate of marital dissolution among adults over the age of 50. Since 1990, the divorce rate for this demographic has roughly doubled. Unlike younger couples who have decades to rebuild their wealth, older divorcees often live on fixed incomes from Social Security, pensions, or retirement savings.
When these assets are sliced in half, the financial impact is immediate and often devastating. A couple that lived comfortably on a combined income may find that the same money cannot support two separate households. This creates a zero-sum game where every asset counts, and the choice between a non-liquid asset (the house) and a liquid asset (retirement funds) becomes critical, often leading people to ask is it better to keep the house or retirement funds in a divorce?
When Keeping Retirement Money Makes More Sense
In the debate of “house vs. retirement,” financial flexibility often favors the retirement accounts. The primary advantage of retirement funds is liquidity, the ability to use those funds to pay for immediate necessities like food, utilities, and healthcare.
Key benefits of prioritizing retirement funds include:
- Survival Expenses: You can eat and pay rent with cash from a 401(k) or IRA; you cannot pay for groceries with home equity unless you sell the house or take out a loan.
- Mobility: Renting offers the flexibility to downsize or move to a more affordable area, whereas owning a home ties you to a specific location and its associated costs.
- Investment Growth: Well-managed retirement portfolios have the potential to grow and generate income, whereas a primary residence often consumes income through taxes and upkeep.
For retirees who may have health issues or limited mobility, the ability to hire help or move into assisted living is far easier when they have liquid capital rather than money trapped in real estate.
The Financial Downsides of Holding Onto the House
Many divorcees fight tooth and nail to keep the marital home, driven by sentimental value or a desire for continuity. However, owning a home is expensive. A common “house rich, cash poor” scenario occurs when a spouse trades their share of the retirement savings to keep the house, only to find they cannot afford to run it.
The ongoing costs of homeownership can quickly drain a single retiree’s budget:
- Maintenance Rules: Financial experts generally advise budgeting 1% to 4% of a home’s value annually for maintenance and repairs. For a $400,000 home, that is $4,000 to $16,000 per year just to keep it standing.
- Major Repairs: Big-ticket items like a new roof or HVAC system can cost tens of thousands of dollars, cash that a “house rich” divorcee might not have.
- Taxes and Insurance: Property taxes and homeowners insurance are perpetual costs that tend to rise over time, regardless of your income level.
If a retiree keeps the house but lacks the cash flow to pay these expenses, they may be forced to sell the home eventually anyway, often under distressed conditions that lead to lower offers.
Why Getting a Mortgage Is Harder After Divorce
Another complication in the “house vs. retirement” decision is the difficulty of refinancing. If one spouse wants to keep the home, they typically must refinance the mortgage to remove the other spouse’s name and buy out their equity.
Why refinancing is harder for older divorcees:
- Strict Underwriting: Mortgage lenders have tightened standards, and qualifying for a loan requires proof of sufficient income.
- Split Income: When a couple’s retirement income is divided in a divorce, the individual incomes often fall below the threshold needed to qualify for a new mortgage.
- Asset Depletion: While some lenders allow borrowers to use retirement assets to qualify (a method known as “asset depletion”), this often requires substantial sums that may not be available after the marital assets are split.
Consequently, many older adults find themselves unable to secure a new mortgage, making the sale of the home the only viable option for equitable distribution.
Talk to an Orlando Divorce Attorney About Your Divorce Settlement Options
While the emotional pull of the family home is undeniable, many couples facing separation find themselves asking is it better to keep the house or retirement funds in a divorce? In gray divorce situations, the financial realities often make retirement funds the superior asset to retain. The liquidity of cash and investments provides a safety net that a house cannot, ensuring that essentials like food, shelter, and healthcare remain affordable. Before making a final decision, it is crucial to calculate the true cost of homeownership against a halved income to avoid the trap of becoming house rich and cash poor in retirement.
Sean Smallwood is an Orlando divorce attorney for the law firm Sean Smallwood, Orlando Divorce & Family Law P.A. where he represents clients in all areas of family law and divorce. 100% of the practice is devoted to family law. As an attorney in Orlando, he has helped many families with a wide variety of family law cases including Divorce, Child Custody, Child Support, and many other issues.