Saving for retirement is complicated enough on its own, but a divorce upsets plans and can impact your schedule. As stressful as it may seem, a divorce doesn’t have to dent your savings or delay your retirement. You can prepare as planned if you take the right precautions. Here are some tips on preparing for retirement in the midst of a divorce.
How Divorce Affects Retirement
We won’t cut corners: a premature divorce can wipe out someone’s retirement savings. A 2018 study from the Center for Retirement Research at Boston College found that divorced households are seven percent more likely not having enough money for retirement. Wealth and income are also generally lower among divorcees than among married couples.
The legal costs of a divorce can take a big chunk out of your retirement savings, and some people have to pay alimony or extra child support. Those living in communally owned states must give up half of their property, including half of their savings (unless a prenuptial agreement provides otherwise).
The financial consequences of a divorce could set back your retirement goals by more than a few years if you don’t take the right recovery steps. No one is prepared for a divorce, but you should always have soft pockets in case something goes wrong. Let’s discuss how you can minimize the damage of a divorce and stay on track.
Acquire a Qualified Domestic Relations Ordinance
If your spouse has an employer-sponsored retirement plan, a qualified domestic relations order (QDRO) could be your saving grace. If you are not the primary beneficiary, this is the only way to get a payment from a 401(k), pension, or similar plan. The non-participating spouse can send the money they receive to their retirement fund, recovering some of the savings they lost in the divorce proceedings.
However, these orders require time and careful attention to detail. The administrator of the pension plan – your spouse’s employer in this case – may have strict rules. In addition, you must ensure that it complies with the Employees Retirement Income Security Act and other state domestic relations laws. Your attorney could write an order, but it might be wiser to hire an actuary who specializes in QDROs.
Know your spousal benefits
A divorce does not guarantee that you lose your spousal benefits. If you are both at least 62 years old, have been married for more than 10 years and have not remarried since then, you and your ex-spouse are still entitled to half of retirement benefits of the other’s social security record. The only catch is that you have to wait two years after your divorce to start receiving payments.
Claiming these benefits does not hurt your ex-spouse or their new partner. It simply ensures that you don’t miss out on the benefits of a long-standing marriage that ended just before retirement. You’ve been together for a long time, so you’re still entitled to half the benefits.
Calculate your new retirement number
Even with a QDRO and spousal benefits, your final retirement number will likely be different after a divorce. Consider these factors when calculating your new number:
- The value of your remaining retirement assets
- Your current income and expenses
- Your age and state of health
- Your expected lifestyle after retirement
Generally, the later your divorce, the more impact it will have on your new number. Divorcing at 35 gives you time to increase your assets and income and reduce your expenses, while a divorce at 55 gives you a smaller window of opportunity.
Your original two-person retirement plan schedule might also need updating. If you have to postpone your retirement date to reach your new goal, you have little choice in the matter.
If you don’t push back your schedule, something else will be negatively affected. Your post-retirement lifestyle may suffer or you may have to work part-time.
You must choose between delaying your retirement or sacrificing your desired lifestyle. Most people choose the latter. The average retirement age of Americans aged for decades and divorce was a major contributing factor, along with student loans and a higher cost of living.
Increase pension contributions
A divorce partially depletes your contributions to your IRA, 401(k), and other pre-income tax savings, so you may need to set aside more of your income to offset it. However, your financial situation may not allow you to increase your contributions immediately. The cost of living tends to be higher in one-person households because you have to pay for all food, utilities, and other expenses.
You have to think in terms of average purchase to get the most out of your investments and make small contributions. For example, if you add $50 more to your retirement savings each month, you’ll get $600 more by the end of the year. Small efforts will help you replenish your savings, not a big project. Just keep snacking and don’t look too far ahead.
Of course, the most effective way to increase your savings is to tighten your budget. Review your recent bank statements and receipts to identify expenses you can remove from the photo. There are many creative ways to consolidate your expenses:
- Reduce your electricity consumption
- Shop at cheaper store brands
- Negotiate your insurance rates, cellular plans, etc.
- Take a break from buying non-essentials
- To eat less
- Reduce your TV subscriptions
- Stop using your credit cards
Balancing these responsibilities can be difficult, so take advantage of budgeting apps, savings calculators, and other resources to help you stay on track. These measures do not have to be permanent. They are only needed as long as you need to set aside more for retirement. Once you regain the ground you lost, everything can go back to normal.
Sometimes a tighter budget isn’t enough to balance your finances. You may need to look for new sources of income. Fortunately, today’s fast-paced world offers many additional income options which allow you to choose the hours. Here are some examples:
- Selling Items on eBay and Other Online Forums
- Have a garage sale
- Rent a guest room on Airbnb
- Write an eBook or produce an audiobook
- Become a freelance writer
- Drive for a ride-sharing service
- Deliver for food delivery app
- Become a dog walker, housekeeper or babysitter
You could also get a part-time job with assigned hours, but this could be difficult for people nearing retirement who may not have the qualifications for a new job. These roles are less demanding and allow you to be independent, so they won’t drastically change your daily schedule.
A divorce can force someone to make significant lifestyle changes, especially if it happens near retirement. You may need to find a new job, move to a smaller house, and cut back on your vacation, to name a few big changes. Although change is never easy, whether the changes are positive or negative is up to you.
Many divorcees let their situation escalate by isolating themselves and dealing with their problems alone. Don’t be afraid to lean on your friends and family during this difficult time. Any lifestyle changes you need to make will feel more manageable with the right attitude and a strong support system behind you. See this new chapter in your life as an opportunity for growth.
Don’t forget the catch-up contributions
If you’re over 50, the IRS allows you to make a larger annual contribution to your tax-advantaged retirement accounts to “catch up” and ensure you retire on time. With a divorce straining your finances, you need to take full advantage of these catch-up contributions and set aside more money.
All of the efforts mentioned above (tighter budget, more sources of income, alternative lifestyle choices) will help you add bigger chunks to your retirement savings. You could add up to $7,000 and $17,000 to your IRA and 401(k), respectively, if you play your cards right.
A divorce does not guarantee later retirement or major life changes, but it will more than likely delay your plans. If you’ve worked out the numbers and your savings rate isn’t enough, you may have to swallow the pill and push back your retirement date.
However, you don’t have to rush to decide one or the other. Talk to a financial advisor and let them give you their perspective on your financial situation. Temporary sacrifices might allow you to retire on time, but you need to get an honest expert opinion on your situation to determine the best course of action.
Divorce doesn’t have to be bad luck
There is no expedient divorce, but it can be particularly unfortunate and damaging just before retirement. You may need to change your schedule, save more money, find additional sources of income, and change your lifestyle.
However, by taking advantage of the benefits to which you are entitled and relying on those close to you, you can survive the divorce without significantly altering your retirement plans. Divorce is not synonymous with bad luck, but you will only find solutions if you are willing to do the work of recovery.
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