Preparing for retirement after a divorce
Saving for retirement is complicated enough on its own, but a divorce throws off plans and can affect your schedule. As stressful as things may seem, a divorce doesn’t have to impact your savings or delay your retirement. You can prepare as planned if you take the right precautions. Here are some tips for preparing for retirement amid a divorce.
How Divorce Affects Retirement
We won’t beat around the bush: an early divorce can destroy a person’s retirement savings. A 2018 study by the Center for Retirement Research at Boston College found that divorced households are seven percent more likely don’t have enough money for retirement. Wealth and income are also typically lower for the divorced than for the married.
The court costs of a divorce can take up a large portion of your retirement savings, and some people may have to pay additional spousal support or alimony. Persons living in community of property must give up half of their wealth, including half of their savings (unless a marriage contract provides otherwise).
The financial fallout from a divorce can 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 must always have flexible pockets in case things go wrong. Let’s discuss how to minimize the damage of a divorce and stay on track.
Obtain a Qualified Domestic Relations Order
If your spouse has an employer-sponsored retirement plan, a qualified domestic relations arrangement (QDRO) could be your salvation. If you are not the primary beneficiary, this is the only way to receive a payout from a 401(k), annuity, or similar plan. The non-participating spouse can send the money they receive to their pension fund, thereby recovering some of the savings lost in the divorce proceedings.
However, these quests require time and great attention to detail to complete. The pension plan administrator—in this case, your spouse’s employer—may have strict rules. Also, you need to make sure that it meets the requirements Employee Pension Insurance Act and other domestic laws. Your attorney could create an order, but it may make more sense to hire an actuary who specializes in QDROs.
Know your spouse benefits
Divorce does not guarantee that you will 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 the old-age pension from each other’s social security records. The only catch is that you have to wait two years after your divorce to receive payments.
Claiming these benefits will not harm your ex-spouse or their new significant other. It simply guarantees that you won’t miss out on the benefits of a long-term marriage that ended near retirement. You have been together for a long time, so you are still entitled to half of the benefits.
Calculate your new pension number
Even with a QDRO and spousal benefits, your final retirement number will likely look different after a divorce. Consider these factors when calculating your new number:
- The value of your remaining retirement savings
- Your current income and expenses
- your age and health
- Your expected lifestyle after retirement
In general, the later your divorce occurs, the greater the impact on your new number. Divorcing at 35 gives you time to increase your wealth and income and decrease your expenses, while divorce at 55 gives you a smaller window.
Your original two-person retirement plan schedule may also need to be updated. If you need to move your retirement date to meet your new goal, you have little choice on the matter.
If you don’t move your timeline backwards, something else will be negatively affected. Your post-retirement lifestyle may suffer, or you may need to work part-time.
You have to choose between delaying retirement or sacrificing the lifestyle you want. Most people choose the latter. The average retirement age for Americans has been getting older for decades and divorce was a major contributor, along with student loans and higher living costs.
increase pension contributions
Divorce uses up some of your contributions to your IRA, 401(k), and other pre-income tax savings, so you may have to set aside a larger portion of your income to make up for it. However, your financial situation may not allow you to increase your contributions immediately. The cost of living tends to be higher in single-person households, as you have to pay for all groceries, utilities, and other expenses.
You need to Think in terms of dollar cost averaging to get the most out of your investments and make small contributions. For example, if you add an extra $50 to your retirement savings each month, that’s an extra $600 by the end of the year. Small efforts will help rebuild your savings, not a big plan. Just keep chopping off and don’t look too far ahead.
Of course, the most effective way to increase your savings is to tighten your budget. Review your bank statements and recent receipts to identify any expenses that you can remove from the picture. There are many creative ways you can consolidate your expenses:
- Reduce your power consumption
- Buy from cheaper private labels
- Negotiate your insurance tariffs, mobile phone tariffs, etc.
- Take a break from buying non-essentials
- Eat out 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 necessary for as long as you have more to save for retirement. Once you regain lost ground, everything can go back to normal.
Sometimes a tighter budget isn’t enough to balance your finances. You may need to find new revenue streams. Luckily in today’s fast-paced world offers many additional income opportunities which allow you to choose the hours. Here are some examples:
- Sell items on eBay and other online forums
- Do you have a flea market
- Rent a guest room on Airbnb
- Write an eBook or produce an audio book
- Become a freelance writer
- Drive for a ridesharing service
- Deliver for a food delivery app
- Become a dog walker, housekeeper or babysitter
You could also get a part-time job with hours allocated, but that could be difficult for those nearing retirement who may not have the qualifications for a new job. These roles are less demanding and allow you to be self sufficient so they don’t drastically change your daily routine.
Divorce can force someone to make significant lifestyle changes—especially when it’s close to retirement. You may need to get a new job, move to a smaller home, and cut back on vacation time, to name just a few big changes. While change is never easy, whether the changes are positive or negative is up to you.
Many divorced people make their situation worse by isolating themselves and tackling their problems on their own. Don’t be afraid to count 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 back support system. See this new chapter in your life as an opportunity for growth.
Think of catch-up contributions
If you’re over 50, the IRS allows you to make a larger annual contribution to your tax-deferred retirement accounts to “catch up” and ensure you retire on time. When a divorce takes a toll on your finances, you need to take full advantage of those catch-up contributions and put more money aside.
All of the efforts discussed above (tighter budget, more sources of income, alternative lifestyle options) will help you add larger chunks to your retirement savings. You could add as much as $7,000 and $17,000 to your IRA or 401(k) if you play your cards right.
Divorce does not guarantee future retirement or major life changes, but it will most likely delay your plans. If you’ve cracked the numbers and your savings rate isn’t enough, you may need to take the pill and push back your retirement date.
However, you don’t have to rush to decide on one or the other. Talk to a financial advisor and let them share their perspective on your financial situation. Temporary sacrifices could allow you to retire on time, but you need to get an expert’s honest opinion of your predicament to determine the best course of action.
Divorce doesn’t have to mean doom
There is no such thing as a timely divorce, but approaching retirement can be especially unfortunate and damaging. 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 you are entitled to and relying on your loved ones, you can get through the divorce without significantly changing your retirement plans. Divorce doesn’t have to be a downfall, but you will only find solutions if you are willing to do the recovery work.
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