The Financial Consequences of Divorce: Implications for Retirement Planning

“Our findings highlight significant and lasting financial effects of divorce”

What is the focus of the paper?

The paper studies the effects of divorce on net worth, pension wealth, home ownership, portfolio composition and changes in family dynamics. The data covers around 5 million individuals in the Netherlands. First, the authors matched divorced individuals with a similar group that remained married. Then, they apply an econometric model (two-way fixed effects, TWFE) to the matched groups to obtain a causal effect of divorce. In this way, the influence of, e.g., selection into divorce, but also time effects from changing economic conditions or policy changes are filtered out from the results.

What are the key findings?

The research finds that the financial consequences of divorce are substantial, especially for women and older individuals. In the year of divorce, women’s net worth falls by nearly 50 percent compared to women who remain married, while for men the decline is 27 percent. Home ownership and equity holdings also decrease more sharply for women, whereas only men experience a reduction in pension wealth. These financial setbacks are not temporary but persist for years. The study further shows how family dynamics change after divorce: about a quarter of both men and women form a new partnership in the year of divorce. After separation, children are more likely to live with their mother than with their father.

What are the implications?

• The research indicates that the financial setbacks resulting from divorce can pose a significant threat to retirement preparedness. This concern is becoming increasingly urgent under the new pension policy, which places greater responsibility on individuals to manage their own retirement savings.
• A nother key finding is that the financial impact of divorce tends to intensify with age. This underscores the need to consider divorce as a crucial factor in pension planning – especially as the number of individuals divorcing later in life continues to grow.
• Divorce also leads to lower rates of stock market participation and homeownership, reducing asset diversification for some individuals – particularly women – after divorce. This, in turn, poses an additional risk to their financial preparedness for retirement.