Dividing assets in a divorce isn’t always straightforward — especially when a pension is involved. Unlike a bank or investment account, a pension represents future income, which means figuring out what it’s worth today requires a special calculation called a pension valuation.
What Is a Pension Valuation?
A pension valuation estimates the present-day value of your future pension payments. It answers the question: “If I could cash out this pension today, how much would it be worth?”
To do this, a professional (often an actuary) looks at factors such as:
- Your expected retirement age and life expectancy
- The plan’s benefit formula
- Current interest rates, which determine how future dollars are discounted back to today’s value
Why It Matters in Divorce
In most cases, the portion of a pension earned during the marriage is considered marital property and must be divided fairly. That division can happen in one of two ways:
- Offset method: One spouse keeps the pension, and the other receives other assets (like home equity or investments) of equal value.
- Split method: The pension itself is divided through a Qualified Domestic Relations Order (QDRO) so both parties receive their share directly at retirement.
Defined Benefit vs. Defined Contribution Plans
Traditional pensions, known as defined benefit plans, promise a specific monthly payout — which is why a valuation is needed. Plans like 401(k)s already have an account balance, so only the marital portion needs to be determined.
The Bottom Line
If a pension is part of your financial picture in divorce, don’t overlook its value. Having a financial advisor and valuation expert on your side can help ensure it’s calculated fairly and that your long-term retirement goals stay on track.