- \ Gerard Gruber
- November 27, 2020
Divorce is a life change that is often fraught with an inordinate amount of personal, emotional, and financial turmoil. In the process of splitting with your spouse, you’ll likely be faced with some...
Divorce is a life change that is often fraught with an inordinate amount of personal, emotional, and financial turmoil. In the process of splitting with your spouse, you’ll likely be faced with some tough decisions you never thought you’d need to make. At times, many elements of your life may feel out of control. But, there are some specific areas you can control to protect yourself and your financial well-being after a divorce. One of those areas is planning for your retirement.
Also, Read Harbor West’s related article: “Facing Divorce in the COVID-19 Pandemic”
Post-Divorce Challenges
Most individuals going through a divorce move from a two-income household to one, suffering a loss of income. In fact, a study done by United States Government Accountability Office in 2017 found that divorce results in a reduced household income of 41% for women and 23% for men. [i] Such a change can disrupt not only your lifestyle, but also your savings goals.
With competing financial priorities vying for your income, you may be tempted to let retirement savings fall by the wayside. However, even amidst the new financial challenges you may be facing, there are ways to plan ahead and get on track for your retirement goals. Trust that you can get back on your feet while still saving to secure your future.
Key Steps to Take
- Estimate Your Retirement Need and Savings Rate
The first step in planning for your retirement after a divorce is deciding how much you estimate you will need to retire. You will need to consider any assets you were able to keep in the divorce, your current income, your age, and your retirement lifestyle expectations. You and your financial advisor will then use those numbers to calculate a savings rate based on your timeline.
Because there are so many factors at play, this may not be as cut and dry as it sounds. Different stages of life can present different financial realities. An individual in their thirties with a mortgage payment and three children still living at home will have different expenses than someone in their fifties with a house that is paid for and adult children who are old enough to care for themselves.
These factors will undoubtedly affect your savings rate, especially after a divorce when you are relying solely on your own income to plan for retirement. But, it’s critical to know what your goal is in order to build a financial plan that appropriately accounts for it.
- Know Whether You Qualify for a Social Security Spousal Benefit
Although social security is rarely a primary source of income for our clients in retirement, it can be a nice supplement that you can piece into your retirement planning puzzle. But, when and how you file for social security can drastically affect your benefit amount.
Social security benefits are adjusted based on the age you begin claiming them. Individuals who claim benefits before Full Retirement Age (FRA) (usually between ages 62 and roughly 67, depending on the year you were born) are awarded a reduced benefit while those who extend beyond their FRA are eligible for an increased benefit. Of course, deciding when to claim benefits isn’t a decision that should be made in isolation, but with a clear view of your other retirement income needs in mind.
If eligible, you may also decide to claim ex-spousal benefits. For the lower-earning spouse, filing on the former spouse’s earnings record may be most beneficial. To qualify, the spouse applying for ex-spousal benefits must be over the age of 62 and the marriage must have lasted for at least 10 years. Additionally, claiming on behalf of an ex-spouse will not affect the ex-spouse’s benefit.
- Evaluate Your Savings Options
After you’ve estimated your retirement income needs, you’ll need to decide where to save your funds. You may already have a 401k or similar IRA plan through an employer. If you do, you’ll want to max out those savings first to redeem the maximum employer benefit available to you.
Beyond the employer-sponsored plan, there are a number of ways you can save additional funds including traditional IRAs and Roth IRAS. While both offer tax advantages, they differ as to when those advantages are provided. Traditional IRAs offer a tax deduction on contributions up front, while Roths offer tax-free withdrawals (and no deduction on contributions). Consult with your financial advisor to decide which savings vehicle will best suit your post-divorce needs.
Starting Fresh
While divorce can certainly throw a wrench in your financial plans, it doesn’t have to completely derail your goals. Sure, your circumstances may have changed, but that simply means that your approach to reaching your financial goals may look a little different or take a different route. You have options and should exercise those that help you reach the final destination as smoothly as possible.
At Harbor West, we understand that life transitions happen all the time, but that divorce is certainly one of the most painful of them. Suddenly you are forced to re-imagine a new life without your partner in the picture. It’s times like these that having a trusted, objective ally to guide you in your financial decision-making can have the most profound affect on your future.
If you or someone you love is going through a divorce, is facing a divorce, or has recently divorced, we encourage you to reach out to us. We provide the financial guidance you need to make it through the next stage of your life on solid financial ground. Schedule a call to learn more about our work with those managing life transitions. We look forward to hearing from you.
For additional financial resources, download our free eBook 10 Things to Consider Before a Divorce here.
This information is provided for general purposes and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the information, please consult your Financial Advisor for individual financial advice based on your personal circumstances. Neither Harbor West nor Geneos Wealth Management, Inc. provide tax or legal advice.
Harbor West is a division of NorthEast Community Bank. Securities and Advisory Services offered through Geneos Wealth Management, Inc. FINRA/SIPC Investment Advisory and Financial Planning Services offered through Geneos Wealth Management, Inc. Investments are not FDIC Insured. Investments are not deposits of the financial institution and are not guaranteed by the financial institution. Investments are subject to risks including loss of principal.
[i] https://www.gao.gov/products/GAO-18-111SP 19 November 2020