Personal Finance

I'm getting a divorce — should I give up half the house or half my 401(k)?

Rich Duprey

Published: December 21, 2024 2:12 pm

My best friend was getting married. At the rehearsal dinner the night before the wedding, his father stood and made a toast. “Marriage is sacred to a man,” he said. “It’s something he only does two or three times in his life.”

That bit of snark underscored that divorce is very much a reality today. The U.S. Census Bureau says that for every 1,000 women, 7.1 are getting divorced. According to the American Psychological Association, the probability of a first marriage ending in divorce is 41% in 2024, and most often occurs within the first seven years of marriage.

Though we vow “til death do us part,” it usually comes a lot sooner than that. And that can result in some difficult financial decisions need to be made.

A house divided

This was brought to mind by a Redditor on the r/Divorce subreddit who is in the process of getting divorced and must decide how to divide his financial assets. He has a 401(k) worth $150,000 and a home to sell with equity after closing costs of about $120,000. There are three options for him:

1. Keep 100% of the 401(k) and receive nothing from the house.
2. Split the proceeds from the 401(k) and the house sale 50-50 with his ex-wife.
3. Keep 100% of the 401(k) and negotiate to receive 20% on the sale of the house.

The situation is complicated because he has children and he wants them to have a permanent home to live in. Apparently his ex-wife will be renting.  However, with only 20% of the proceeds from the house ($24,000), the Redditor won’t have enough for a down payment on a new home. If he could negotiate half the proceeds, he could. But he’s also worried about retirement, which makes option 2 a difficult choice for him. The Redditor wants to know which option would be best.

24/7 Wall St. Key Points:

• Divorce is a reality for millions of Americans, even as the incidence of divorce has slowly declined over the past few years.
• A marriage failure, though, does create difficult financial decisions that need to be made, making it important to consult with a financial professional before taking any course of action.
• Also: Take this quiz to see if you’re on track to retire (Sponsored)

Consider all the circumstances

Situations like divorces make the perfect time to speak with a financial professional. They can give specific recommendations based on the more in-depth details you provide about your individual situation. So, while I’m not a financial planner, and these are just my opinions, this is what I would recommend based on four primary considerations. 

First, the Redditor is relatively young, so he can count on working for another 25 to 30 years, plenty of time to rebuild his retirement savings. Particularly because rules allow for catch-up contributions once you are in your 50s (with even greater amounts in your 60s), it diminishes concerns about giving up half of the 401(k) savings.

Second, what is the housing market like in his area? While the sector is in a state of flux, certain markets still exhibit strong price appreciation. If the Redditor was in such a market, owning a home could be a good long-term investment for him.

Third, the stability of his children. Because that is an overriding concern, getting a home provides significant emotional and practical benefits.

Last, the Redditor’s current financial needs need to be assessed to determine whether he could temporarily rent while saving for a home. 

The financially sensible solution

Because option 3 is similar to option 1, but with a monetary kicker, we can dismiss option 1. And though the Redditor would like half the home’s proceeds to buy a new home and keep his 401(k), that’s too much like having his cake and eating it too. While there are ways to buy homes still with little to nothing down, it might require renting for a bit, which the Redditor seems reluctant to do. And he’s not certain if his ex-wife will give him even 20% of the proceeds.

That makes option 2 the financially sensible choice. It allows the Redditor to purchase a smaller home, provide the stability for his children he seeks, and retain a substantial portion of his retirement savings. Since he is still in his mid-30s, he has plenty of time to rebuild his 401(k) contributions. This option also happens to minimize risk by diversifying his assets between real estate and retirement savings.