Preparing for Retirement When You’ve Gone Through a Divorce

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Saving for retirement is difficult enough. However, a divorce can throw a wrench into your plans and could impact your timeline. As stressful as things might seem, a divorce doesn’t have to put a dent in your savings or delay your retirement. If you take the necessary precautions, you can still prepare for your retirement as planned. Here are some tips for preparing for retirement during a divorce.

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How Divorce Affects Retirement

We won’t beat around the bush: an untimely divorce can devastate 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 to not have enough money for retirement. Divorcees have lower earnings and wealth than married couples.

The legal costs of a divorce can take a big chunk out of your retirement savings, and some people have to pay additional spousal support or alimony fees. If they are living in community property states, they must give up half their possessions and half their savings.

The financial aftermath of a divorce could set back your retirement goals by more than a few years if you don’t make the right recovery moves. While no one is ready for divorce, it’s important to have enough money in case things go wrong. Let’s talk about how to minimize the damage caused by divorce and keep things on track.

  • Acquire a Qualified Domestic Relations Order

If your spouse has an employer-sponsored retirement plan, then a qualified domestic relations order (QDRO) could be your saving grace. If you’re not the main beneficiary, it’s the only way to get a payout from a 401(k), pension, or similar plan. The money received by the spouse who is not a participant can be sent to their retirement fund. This will allow them to recoup some of the savings they have lost during the divorce proceedings.

However, these orders take time and strict attention to detail to complete. Your spouse’s employer, the retirement plan administrator, may have specific rules. Plus, you have to make sure it complies with the Employee Retirement Income Security Act and other state domestic relations laws. An attorney could draft the order, but it might be more practical to hire an actuary who is a specialist in QDROs.

  • Know Your Spousal Benefits

A divorce does not guarantee you lose your spousal benefits. If both of you are at least 62, were married for 10 years, and have not remarried since, you and your former spouse are still eligible for one-half of retirement benefits from each other’s Social Security record. To begin receiving payments, you must wait at least two years after your divorce.

Claiming these benefits does not hurt your ex-spouse or their new significant other. It is a guarantee that you won’t be denied the benefits of a long-standing marriage that ended before your retirement. You are still eligible to half the benefits if you were married for a long period of time.

  • Calculate Your New Retirement Number

Even with a QDRO and spousal benefits, your final retirement number will probably look 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 health
  • Your expected post-retirement lifestyle

As a general rule, the later your divorce, the greater an impact it will have on your new number. Getting divorced at 35 leaves you time to increase your assets and income and cut back on your expenses, while a divorce at 55 leaves you a smaller window of opportunity.

  • Update Your Timeline

The timeline of your original two-person retirement plan also might need updating. You have no choice but to move your retirement date forward to achieve your new goal.

If you don’t push back your timeline, something else will get negatively affected. You may find it difficult to maintain your post-retirement lifestyle.

You must choose between delaying retirement or sacrificing your desired lifestyle. The majority of people choose the latter. The average retirement age for Americans has been getting older for decades and divorce has been one of the primary contributing factors, along with student loans and a higher cost of living.

  • Increase Retirement Contributions

A divorce partly depletes 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. Your financial situation may not allow you to increase your contributions immediately. Single-person households tend to have higher costs of living because they must pay for all the food and utilities.

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 every month, that’s an extra $600 by the end of the year. It’s not necessary to make a huge effort to rebuild your savings. Keep working hard and don’t think too far ahead.

  • Tighten Your Budget

Naturally, the most effective way to increase your savings is to tighten your budget. To identify expenses that you can eliminate, review your bank statements and receipts. There are many creative ways you can consolidate your spending:

  • Lower your electricity usage
  • Buy from cheaper store brands
  • Negotiate your insurance rates, cell phone plans, etc.
  • Take a break from buying non-essentials
  • Eat out less
  • Reduce your TV subscriptions
  • Stop using your credit cards

It can be difficult to balance these responsibilities, so you should take advantage of budgeting apps, savings calculators, and other resources to help you stay on track. These measures don’t have to be permanent. These measures are only necessary for as long as you have to save more money for retirement. Everything can be restored to normal once you have regained the ground you lost.

  • Find New Income Sources

Sometimes a tighter budget isn’t enough to balance out your finances. You might need to look into new income streams. Thankfully, today’s fast-paced world provides many additional income options that enable you to choose the hours. Here are some examples:

  • Sell items on eBay and other online forums
  • Have a garage sale
  • Rent a spare bedroom on Airbnb
  • Write an eBook or produce an audiobook
  • Become a freelance writer
  • Drive for a ride-sharing service
  • Deliver for a food delivery app
  • Become a dog-walker, housekeeper, or babysitter

You could also get a part-time job with assigned hours, but that might be difficult for those close to retirement who might not have the qualifications for a new job. These roles are more manageable and allow you to be independent, so they won’t significantly change your day.

  • Adjust Your Lifestyle

A divorce can force someone to significantly alter their lifestyle – especially if it happens close to retirement. One of the biggest changes you might have to make is to find a new job, relocate to a smaller home, or cut back on vacations. Change is not easy. However, you can decide if the changes are beneficial or detrimental.

Many divorcees let their situations get worse by isolating themselves and taking on their problems alone. During difficult times, don’t be afraid of reaching out to your family and friends. With the right attitude, support system and a strong support network behind you, any lifestyle changes that you make will be easier to manage. This new chapter in your life is an opportunity to grow.

  • Remember Catch-Up Contributions

If you’re over 50 years old, the IRS permits you to make a larger annual contribution to your tax-advantaged retirement accounts to “catch up” and make sure you retire on time. You should take advantage of these catch up contributions and make more money if you are going through a divorce.

All of the efforts discussed above (tighter budget, more income sources, alternative lifestyle choices) will help you add bigger chunks to your retirement savings. You could add as much as $7,000 and $17,000 to your IRA and 401(k), respectively, if you play your cards right.

  • Talk to an Expert

A divorce doesn’t guarantee later retirement or major life changes, but it more than likely will delay your plans. If your savings rate is not sufficient, it might be time to take the plunge and delay your retirement date.

However, you don’t have to rush to decide one or the other. Talk to a financial advisor to get their perspective on your financial situation. Temporary sacrifices may be able to allow you to retire on schedule, but you need to get an expert’s honest opinion about your situation to determine the best course.

Divorce Doesn’t Have to Spell Doom

There’s no such thing as a timely divorce, but it can be especially unfortunate and damaging just before retirement. You might need to adjust your life, change your schedule, save more money, or find new income sources.

However, by taking advantage of the benefits you qualify for and leaning on your loved ones, you can survive the divorce without significantly changing your retirement plans. You don’t have to divorce to be a disaster. However, you can find solutions if your are willing to do the work.

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