Divorce in California Part 2: How Are Pension Benefits Divided?

If you're getting divorced in California and you think dividing a pension is just "give or take half and we're done here," that mindset is usually what ends up costing you real money down the road. Of course, the formulas and such for splitting retirement benefits matters, but it's not the only thing. Another common oversight is clarifying what happens to that pension the day the retiree dies, which isn't always top of mind during the divorce process. In part 2 of our California divorce mini-series, I'm walking you through generally how pensions are looked at in California divorces, how benefits are generally calculated and determined, what determines how long those payments actually last, and the survivor benefit traps that haunt people who thought they'd already handled everything correctly.

00:01:18
Welcome back to part 2 of our divorce in California mini-series. This also happens to be Episode 100, which is super exciting for me. This is a huge milestone for this podcast. We work really hard to get you some of the best and most unique content available. We've discussed so many topics that remain highly relevant for those of you out there who want to make the most of your money and your life goals. So thank you so much for sticking with me this long.

00:01:48
For those of you who may be listening to this podcast for the first time, definitely scroll through previous episodes, as I am positive that you will find many golden nuggets to help you along the way. And certainly, go back to listen to part 1 of our divorce in California mini-series, because you'll want to know those details before diving further into this episode.

In part 1 of this series, we laid out the difference between a pension and something like a retirement account, like a 401(k), 457, TSP, 403(b), etc. So when I say "pension," I am referring to the future retirement income stream, or what we call a defined benefit plan. I'm not talking about those other retirement accounts like the 401(k), the TSPs, and such. Those are considered defined contribution plans. So today we're getting into the part everybody actually wants to know: how much of that pension is really up for grabs, how might my attorney or the courts land on the number that I'm going to receive every month, and what can go wrong years down the road if mistakes are made.

00:03:00
But before we get into the details, you need to understand what you're actually dividing, because a pension in California may not be as simple as, "Hey, half of that is mine," or "I have to give half of this away."

So the first thing you want to understand is that California is what is called a community property state, and generally speaking, property acquired during the marriage is presumed to be community property, which would include the compensation from labor that took place during the marriage. For example, if your spouse goes and earns $100,000 a year, that $100,000 a year is also theoretically yours too, at least until separation. I say that because, as your spouse was paid that income throughout the year, or throughout each year, part of that compensation comes out of their paycheck before they even see it, to accumulate in their pension plan, if they have a pension plan to begin with. Whether that's something like a private company pension, it could be CalPERS, CalSTRS, it might be FERS for federal employees, or some city or county pension like SBCERA for San Bernardino County workers, for example.

00:04:21
Generally speaking, in a divorce, each spouse is entitled to one half of each community property asset. The wrinkle with pensions is that the pension employee's work life often lasts longer than the marriage, and that's either because they worked for whatever entity prior to being married, they continued throughout the marriage and even after the divorce, or sometimes it might be one or the other. Maybe they worked there prior to the marriage, and then they left at some point during the marriage and worked somewhere else, or they got the job during the marriage and continued to work and build upon that pension after the divorce, only to retire years later.

For those reasons, pension plans oftentimes end up being a mixed asset, comprised of both community and, what we call, separate property of the spouse who earned it. For instance, if you worked for an entity and deferred part of your paychecks into their pension system prior to getting married, those deferrals and the money earned on those deferrals are typically separate property. Same thing goes for the back end of the marriage. Let's say after your date of separation you continue to work and defer into the pension system. Those deferrals and the earnings on them are also typically considered separate property.

00:05:49
Now, one thing I want to note is that when doing any sort of estimating or financial planning as far as the amount of benefits you might be entitled to post-divorce, when doing these calculations, the length of marriage may not go all the way through the date the divorce is filed or signed off by a judge. Typically, for purposes of pension division, the length of marriage is when the marriage begins up until what is called the date of separation. And that date is typically sometime around when you and your spouse physically separate with the intent to split.

The easiest example would be if one spouse moves out of the family home and lives somewhere else once you split. However, in some cases, this date of separation might be a little muddy, which is another reason why you should always consult an attorney to help determine this, because it will be very important when determining things like retirement benefits later. So this is why, as you'll see later, dividing pension benefits can get a little complicated. It's not so easy to say, "Half of my spouse's pension goes to me," or whatever. You have to keep in mind that there are some assets that may not be 100% community property or not community property at all.

00:07:12
In addition, your divorce may not follow the so-called conventional wisdom. You and your attorney and your ex and their attorney may agree to have some alternative method of splitting up community property. Maybe you have a very expensive home, and you happen to have a lot of equity in it at the time, and you really want to keep that home and stay there, and you even have your own sufficient income and retirement savings. Well, in a case like that, you might negotiate to keep the home and/or your own retirement savings and allow your spouse to retain all of their pension benefits that otherwise would have been divvied up. Or maybe you come to an agreement that allows your ex-spouse to pay you a one-time lump sum in order to buy you out of your share of their pension benefits. In other words, there really is no hard and fast rule that every single community property asset must be split down the middle no matter what. This is why doing some sort of planning—and I know that sounds kind of weird, but yes, planning during and after your divorce is so important.

00:08:24
Okay, so let's get slightly more technical. How do you determine a pension benefit amount that you might receive post-divorce? How do you get in the ballpark? Just as a caveat before we get into this, different types of pensions, such as certain military or federal pensions, may work slightly different than others that exist in California. Because, of course, you can live in California but have or be a part of a federal pension. So these are just some general formulas and rules that have been used historically. So in California, what's often called the time rule is typically used when dividing pension streams. Sometimes called the Brown formula, which is named after a Supreme Court case in California in 1976, and that basically established that pension rights, vested or not, are community property to the extent they were earned throughout the marriage. Kind of like what we talked about earlier. The formula, this time rule or Brown formula, it's pretty straightforward. What you do is you take the employee spouse's length of service with the pension provider during the marriage up through the date of separation, and you divide it by their total length of service at retirement. That fraction is the community property percentage. The non-employee spouse's typical share is then half of that community percentage.

00:09:55
Here's a caveat, because of course there always is. And it's super important because it can actually change your number significantly. Length of service doesn't get measured the same way by every pension plan. Some plans just count actual calendar years employed. Others, like CalPERS and CalSTRS are good examples, measure it through something called service credit, which is the plan's own internal accounting of time, basically. Not a straight count of years on payroll. Service credit can come in lower than actual years worked. If there was, let's say, a part-time stretch or an unpaid leave of absence, and it can come in higher if someone purchased or bought back service credit from another related retirement system. Before you and your advisors run this math on your own situation, find out whether the specific plan uses actual years worked or its own service credit type of calculation. They're not always the same thing.

00:11:01
Here's a very general example. A member has 25 years of total service and accrued 12 of those years during the marriage. The community fraction would be 12 divided by 25 in this case, which is 48%. If the future monthly pension benefit ends up being $7,500 a month, then $3,600 a month of that is community property, which is the 48%. And then you split it equally, and the non-member spouse receives roughly 24% of the future pension amount, which would be about $1,800 a month. So again, that 24% is just the 48% community property portion divided by 2.
A couple of critical points on this time rule slash Brown formula. Like I mentioned briefly before, the date that matters the most, I think, in these situations is the date of separation, not the date of filing and not the date the divorce is finalized. And that date itself can become a contested or litigated fact if the couple doesn't agree on when they actually split. Like I mentioned earlier, the attorneys are very helpful in determining what was actually that date of separation, because it might not be very clear.

00:12:24
Now, let's briefly touch on the 10-year myth you may hear about at some point or another throughout the process. This is one of the most common misconceptions in this space. There is no minimum marriage requirement in California for a spouse to have a community property interest in a pension. If you were married for 2 years and your spouse accrued pension benefits during those 2 years, you generally have a community interest in that slice. And I think many people think this or believe this because they hear about a 10-year type of rule that actually applies to alimony and spousal support in California. Alimony or spousal support, same kind of thing. People hear 10 years, divorce, and California in the same sentence and may assume it's talking about everything, including a pension, when they are actually different things. Some people also might get this confused with Social Security's rule that you need to have been married at least 10 years to claim benefits on an ex-spouse's earnings record. That's a Social Security Administration rule, completely separate from state community property laws. It has nothing to do with dividing a state, local, or private pension.

00:13:46
Another frequently asked question is, do other assets or income streams affect the pension benefit part of my divorce negotiations? The answer is absolutely, and this is where the tax and financial planning side of this becomes as important as the legal side. Because pension division happens within the broader context of an overall property settlement. Spouses can and do often negotiate. One spouse keeps a larger share of the pension or all of it in exchange for the other keeping more home equity, like the example I gave earlier, or a larger share of the investment accounts, maybe, that are separate from the pension. Or some sort of cash offset payment, right? There's a lot of different ways that this stuff can happen. The pension itself isn't required to be physically split if the parties agree to an equivalent value trade using other assets. And that's usually something they determine with their advisors and definitely their legal counsel.

00:14:52
If you're in a situation where your ex is looking to buy out your share of their pension amount or offset it with other assets, this buyout slash offset approach requires a qualified professional to calculate the present value of the future pension payments. In other words, what would be the lump sum value in today's dollars of the future stream of pension payments that my ex would receive from retirement until death? In these cases, you have to discount the expected stream of future payments and their growth back to today's dollars, which requires using mortality assumptions and an appropriate discount rate that both parties can agree upon. Because that's the only way to convert a lifetime income stream into a single number you can use to trade a lump sum of other assets today. So hopefully that makes sense, at least somewhat. This is definitely a type of situation where your attorney, a domestic relations order and a qualified domestic relations order specialist, or even some financial advisors can assist with throughout the process.

00:16:11
How long might pension benefits last after a divorce? And what could potentially end those benefits or cease those benefits? Well, generally speaking, for many of the defined benefit pensions divided under that time rule in California, once the non-pension or non-member spouse's share starts, which might be when the member is actually eligible to retire, those payments generally continue for the life of the member. That's how the underlying pension itself is structured. They're usually a lifetime annuity. But again, there's always a caveat, right? What kind of episode of this podcast doesn't mention a caveat?

00:16:54
There are different situations that can, but not always, put an end to pension benefits. First being the member's death. So when I say the member, that is the person that is working for the entity with the pension, that earned the pension. That is, unless the domestic relations order or even a qualified domestic relations order for some private pensions specifically secures survivor benefit continuance for the non-member spouse, which I'll cover more of shortly. Without any special provisions, the payments may simply stop at the member's death, which can be detrimental to your livelihood if they pass prematurely. So this is where your attorney again can truly shine. And by the way, the non-member spouse's own death ends their share of any pension benefits they were collecting. Obviously, because that's their personal entitlement from the divorce, those benefits cannot continue down to their kids or something like that, for example.

What about remarriage? A remarriage of either party generally does not end pension division payments. This is an important distinction from spousal support or alimony. Pension division is more of a property right, not a support obligation. So remarriage doesn't automatically cut it off the way it might affect your alimony or your spousal support.

00:18:29
However, military survivor benefit plan, or the military survivor benefit plan, that's a different type of coverage, can work a little bit differently here. So just as a reminder, always check with your own attorney about your own situation. Not all of these pensions work the same. Just generally speaking, a remarriage doesn't typically end payments just because you got remarried. Another thing that can affect how long payments last is the plan-specific benefit election or option that is made by the member at retirement. The retiring member has to elect a specific payment option at retirement for their pension. There's usually multiple benefit options to choose from, and you can pick the best for you depending on your retirement plan and your current situation. Under something like SBSERA's structure, for example, which is San Bernardino County's pension system, the domestic relations order, or DRO, that we talked about in part 1, that's drafted at some point during the divorce, can include language requiring the member to choose an option that provides a continuance to the former spouse.

00:19:49
Otherwise, the member could select the maximum benefit that just covers their own life starting in retirement with only some potential survivor protection, which can leave the former spouse's future survivor interest in those pension benefits unprotected when the member passes away. For other pensions, not SBCERA, but some other ones, there are options that provide no benefits at all for a survivor. So it's very important to talk with your attorney about whether or not you need some language like that to help preserve a benefit for you when the member, your ex, eventually passes away.

And that leads me to the concept of survivor benefits and the various traps that you can fall into here. And this is, in my opinion, the single most underappreciated risk in the entire pension division process. A DRO or QDRO that divides the monthly benefit while the member is alive does not automatically protect the former spouse if the spouse with the pension dies first. Okay, we kind of mentioned that previously. Again, SBSERA's structure is a great teaching example. When a member retires, they choose a payment option ranging from the maximum benefit available, which actually has a 60% continuance to a spouse, to other options that reduce the monthly benefit for the retiree in exchange for maybe a larger continuance to the spouse after death, etc.

00:21:30
If the soon-to-be-ex-spouse wants to preserve a survivor benefit in case the spouse with the pension passes away prematurely, then again, the domestic relations order will likely need to have some language requiring the pension member to select an option that provides some continuance to the soon-to-be-former spouse and name them as the beneficiary. The issue for a pension like SBCERA, for example, is that this is only an option if the divorce occurs before the member retires and makes a pension benefit election. However, we live in the real world. So unfortunately, sometimes a member retires and elects this single life benefit, sometimes called an unmodified benefit, while they're still married, which could have made sense at the time, but then they end up getting divorced later, which throws a wrench into this whole thing. The reason is because, at least for our SBCERA example, court orders can't go back after the fact and change the benefit election your spouse already made with the retirement system. Again, at least for SBCERA, if the pension spouse remarries before they pass away, the new spouse may actually get the survivor benefits if they're over age 55 and were married to the pension spouse at least 2 years before death. So kind of interesting stuff here.

00:23:00
Some more examples. CalPERS works differently than SBCERA. No surprise there. A lot of these work different. CalPERS' unmodified option, on the other hand, is genuinely a zero continuance benefit, meaning that option pays the highest monthly allowance to the retiree, but nothing continues to anyone after the member dies, not even a current spouse. Yes, you can run into some issues here because if the unmodified option is elected and the divorce happens later in retirement, again, there's typically no way to go back and change that for a survivor benefit. If the divorce is happening before retirement, and we're still talking about CalPERS here, and before the spouse with the pension elects their option, then again, your attorney can usually draft a domestic relations order that might require the member to choose an alternative option that allows a survivor benefit to continue paying to the ex-spouse after the pensioner's death based on a specific formula. In other words, the only way a former spouse or ex-spouse gets an ongoing continuance or survivor benefit at all is if the member elected one of the other reduced pension options and specifically named them as the beneficiary.

00:24:26
Another very common and large pension system in California, CalSTRS. CalSTRS gives a retiring member two paths, so to speak. The member-only benefit pays the full unreduced monthly amount for the member's lifetime, but it ends the moment the member dies. Nothing continues to anyone, similar to the unmodified option for CalPERS. The alternative is a modified benefit or some sort of modified benefit. The monthly amount is permanently reduced in exchange for a survivor benefit or continuance. And there's different options. It might be 100%, 75%, or 50% that continues on to a named beneficiary, like a spouse, or split across multiple beneficiaries under what is called their compound option.

00:25:20
If the member retires and elects a modified benefit, naming their current spouse as the beneficiary, then later divorces, that election does not just disappear on its own. What happens next depends entirely on what the divorce judgment says. If the judgment is silent, the member can cancel that election unilaterally. They can drop down to the member-only benefit. They get the full remaining check. Nothing continues to anyone at their death, and there's no refund of the reduction that they already took.

But if a domestic relations order or DRO specifically orders the member to keep the ex named as beneficiary for their community property share, CalSTRS may not allow the pension member to unilaterally remove them. The order can even split it. It can lock the community property portion in place for the ex while leaving the member free to do whatever they want with the rest. If the member remarries later, a new spouse can be added as a beneficiary, but only inside whatever structure was already elected. So the 75% joint and survivor option stays the 75% joint and survivor option, just with a new name on it.

00:26:42
Similar to the other retirement systems referenced, if the member retired and chose the member-only benefit option prior to divorcing, there's no DRO, no court order, nothing that can force a survivor benefit into existence after the fact. CalSTRS' own rule states that a member who retired member-only is not permitted to later name a former spouse as a beneficiary, regardless of what a court orders. There's also sort of a fix for someone who's already retired but instead chose one of the modified benefit options. In other words, they chose an option that would continue to their spouse at some percentage and gets divorced later with an order requiring a continuance to the non-member ex-spouse. CalSTRS allows the member to convert specifically over to that compound option that I mentioned earlier to satisfy that court order division. That's the one case where the underlying structure itself can change after retirement.

00:27:53
And really, all of this is why the clean move is getting the order done or having your attorney get the order done before retirement instead of fighting over it afterwards. CalSTRS' model language for a pre-retirement divorce has the member make a pre-election under the compound option, naming the non-member spouse as beneficiary for their community property share from day one. The election happens once, correctly, instead of relying on a cancellation fight or a post-retirement conversion to try and fix it later.

It's also worth mentioning that military pensions add another layer through what is called the survivor benefit plan, or SBP. I kind of mentioned this earlier. This is a separate elected annuity. It's not automatic. Former spouse SBP coverage must be elected within one year of the divorce decree, or the former spouse permanently loses eligibility, regardless of what that decree says. This is sort of a recurring problem in the real world with these pensions. Sometimes these decrees clearly ordered this SBP coverage, where the one-year deadline just kind of expired simply because nobody tracked it. These are, of course, just some of the major pitfalls, not all of them. The lesson across every single one of these retirement systems is that the division of the ongoing monthly pension benefit and preservation of benefits after the member's death are two separate questions, and a DRO or QDRO should answer both, really. This will, of course, be your attorney's job, but you having some background and what to look for and what to ask is what can make a life-changing difference in your post-divorce financial outcome.

00:29:47
We've covered a lot so far. Hopefully, I've been able to make this as clear as possible, but I want to spend a minute on something people often gloss over. Every plan I've mentioned so far in my examples, so CalPERS, CalSTRS, SBCERA, is what is called a defined benefit plan, like I mentioned at the beginning. Yet they still don't all divide the same way. If you take one thing from this episode, don't assume the mechanics from one plan carry over to another, even within, let's say, the public sector. CalPERS generally gives you a choice of two methods. One is the time rule formula I already walked through, where the former spouse's share stays tied to the member's account, so to speak, and only starts paying when the member actually retires. The other is what CalPERS calls separation of account, which is available when the member hasn't retired yet, where the community share is sort of carved out into its own separate account that the ex-spouse or the non-pension spouse controls outright.

00:30:53
That means the former non-pension spouse can choose their own retirement date, their own beneficiary, their own payment option, all independent of what the member decides to do with their half. That's a meaningfully different planning conversation because it hands the non-pension spouse control over their own timeline instead of leaving them waiting on someone else's decision. CalSTRS offers something in the same spirit through its own process, though the specifics of what's available depend on the member's status at the time the order is entered. Again, this is exactly the kind of thing where you definitely want to sit down with your attorney to review rather than assume.

00:31:37
SBCERA and other County 37' Act retirement systems generally don't offer that separate account option that we just mentioned. The former spouse's interest usually stays attached to the member's account, which means the non-pension spouse's payments don't start until the member decides to retire. And this is a decision that's mostly out of the former spouse's hands. If the member delays retirement for, say, five years, the former spouse's share of income from the pension generally waits five years too, whether or not that timeline works for their own retirement plan. Now, in your actual divorce decree, you might have other stuff in there that sort of makes up for that risk, but to each his own.

00:32:26
Let's bring this all back down to earth because I don't want anyone listening to this and thinking they know how to draft their own domestic relations order or something. First, there's no tenure rule for pensions in California. If your spouse earned pension benefits during your marriage, you generally have a community interest in that portion, regardless of how short the marriage was.

00:32:48
Second, the math typically follows the time rule or that Brown formula in California. So years of service during the marriage, divided by the total years of service, or it might be total service credit, split roughly in half. That gets you a reasonable expectation, not a guaranteed number, because plan-specific rules and negotiated trade-offs or offsets can move it.

00:33:14
Third, how long can payments last and whether they survive the pension member's death are two completely separate questions. Getting the monthly split right and getting survivor protection right both have to happen on purpose in writing.

Number four, the plan matters. CalPERS may let a former spouse separate their account and control their own timeline of when their pension starts. SBCERA and most county systems in California generally don't.

00:33:48
Lastly, and probably most important of all, none of this is a substitute for a family law attorney who actually drafts these types of orders for a living and deals with divorces and pensions quite often. I've given you some of this information so that you walk into that process knowing roughly what to expect instead of finding out for the first time from, let's say, a court document.

00:34:14
Also, a financial planning conversation needs to happen at some point throughout the process. This is where a competent financial advisor looks at what this actually means for your retirement income plan post-divorce, your tax picture after the dust settles, and the offsets are negotiated, if any, and how all of this fits against every other asset that is a part of your settlement.

That does it for this miniseries on divorce in California. I've added a link in the episode show notes where you can get access to my free book for divorcees and widows, Finding Financial Clarity and Confidence When Starting Over. So be sure to check that out. Also, if you found this valuable, please share it with somebody who could use this information.

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00:36:23
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your advisor prior to investing. Cameron Valadez is a registered representative, and securities and advisory services are offered through LPL Financial, a registered investment advisor, member of FINRA SIPC. Neither LPL Financial nor its registered representatives offer tax or legal advice. Always consult a qualified tax advisor for information as to how taxes may affect your particular situation. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific tax issues with a qualified tax or legal advisor. Tax and accounting-related services offered through Planet Business Services, DBA Planable Wealth. Planet Business Services is a separate legal entity and not affiliated with LPL Financial. LPL Financial does not offer tax advice or tax and accounting-related services.