5 Ways to Stop Divorce From Destroying Your Retirement
More and more couples are ending their long-term marriages, and this so-called “gray divorce” can upend retirement plans. But careful planning can mitigate the financial fallout, advisers say.
According to data from the Pew Research Center, divorce rates among people over 50 have doubled since the 1990s. Those at particular financial risk are spouses who could have stayed home to raise a family – who are not always, but the most often women. Divorce can be especially confusing for spouses who have put aside a career to raise a family and have little or no retirement savings to their name. Some may also have ceded control of family finances to their breadwinner partner, so they don’t have a solid foundation on which to make a new financial plan.
“Most people need a whole new plan because the landscape has changed,” says Joseph Heider, president of Cirrus Wealth Management.
It may sound daunting, but it’s important to get your finances under control, especially if you’ve never managed a family budget, says Meredith Stoddard, experience manager for life events at Fidelity Investments. “It gives you a sense of control and empowerment,” she says. (She recommends Fidelity divorce document checklist as a good starting point if you feel overwhelmed.)
While much of the advice below is for anyone facing divorce after decades of marriage, financial planners say it’s particularly relevant for those facing the prospect of being financially independent after a marriage. long break or for the first time. Here are some steps to take before your divorce is finalized:
Recalculate your budget
A 2018 article by Center for Retirement Research at Boston College found that divorce is correlated with a “substantial” increase in the likelihood of financial risk in retirement. The paper notes that divorce can erode household wealth in several ways: the cost of legal representation and fees can have a short-term financial impact, while creating two separate households – and doubling all costs associates – can have a more lasting impact on your standard of living and your ability to save money.
According to a new survey from Fidelity Investments, more than one in three respondents who have divorced say they still have financial difficulties five years later. Fidelity found that even among those actively involved in managing household finances, more than one in four were surprised at the cost of living alone.
Creating a realistic budget will help you avoid costly miscalculations. Be sure to include savings in your plan. “Start small,” says Stoddard. “Build up an emergency fund over time, even if you start at $50 a month.
One thing you shouldn’t do, experts say, is start investing in much riskier asset classes or funds in an attempt to catch up. With a shorter time horizon before retirement, you have no leeway to weather an outsized downturn and wait for a subsequent recovery. Avoid flashy investments that guarantee high returns or high returns and stick to basic index funds that track all of the stock and bond markets.
More than one expert has discussed the emotional toll of divorce in the context of your budget: If you can afford it, consider setting aside some money for therapy.
Enter or stay in the labor market
Stoddard says a common worry among stay-at-home spouses is that divorce equates to financial ruin, since they weren’t earning a salary in their own name. But this is a misconception. “Women often devalue housework and caregiving. Don’t forget that it is a contribution to the marriage. When it comes to dividing assets, there is value there,” she says. Divorce courts will consider this time and labor to determine how much of a couple’s collective assets each party gets.
Even so, Stoddard (and others) recommend joining the workforce. “If you haven’t worked outside the home in a while, just picking up any job and getting into a routine can boost your confidence,” Stoddard says.
Heider adds, however, that you may need to adjust your expectations if you return to the workforce after a long absence. “They need to make a realistic assessment of their job skills. They have to be realistic about what kind of compensation they’re going to start at,” he says.
Keep in mind that a paycheck isn’t the only reason to work. Until you reach the Medicare eligibility age of 65, the need for health insurance is also a big motivator for entering or re-entering the workforce. Depending on your spouse’s health coverage and the state you live in, you may be able to continue paying for COBRA coverage for a while, but this may be prohibitively expensive for people already exhausted by the cost of the divorce itself and the cost. to establish a separate household. Coverage through an employer can be cheaper than COBRA and coverage you can buy on the individual market through the Affordable Care Act.
Maximize your social security benefits
Delay Social Security payments as much as possible to maximize the spousal benefits you can claim. If you have been married for at least 10 years, you are entitled to social security benefits based on your ex-spouse’s work history.
This is even true for the many spouses — usually women — who have no work history. “For these women, delaying Social Security for as long as they can to make sure they get a slightly larger benefit is really important,” says Geoff Sanzenbacher, associate professor of economics and research fellow at the Center for Boston College Retirement Research. “The biggest thing they can do is try to maximize that advantage.”
If you apply at age 62, you will get about 75% of what you would have received had you waited several years for what the government calls your full retirement age, when you get 100% of what you you are entitled. You can receive even more than that – what the government calls “deferred retirement bonuses” – if you can defer beyond full retirement age, up to age 70. The difference can amount to tens or even hundreds of thousands of dollars over a long lifetime.
Create a retirement account in your name
If you don’t have your own IRA, set one up before the divorce is finalized. You’ll need one of these tax-deferred retirement vehicles to deposit the retirement assets you receive from your spouse without incurring a penalty. This claim takes place through a process called a QDRO, or Qualified Domestic Relations Order, which is usually undertaken in conjunction with a divorce order, but is legally separate from it.
“The non-working spouse should set up an IRA and have that money transferred directly so that there’s no tax on it and it continues to grow,” Heider says. The IRA should be set up when the legal paperwork is complete, so the money can be transferred directly to the new retirement account. If you cash and receive a check, the government withholds 20% as an estimate of what you should pay in taxes on those funds (although you won’t be hit with the additional 10% penalty for withdrawing funds before the age of 59.5 years). ).
While cashing out can give you short-term cash, keeping that money invested in a tax-deferred retirement account will do much more for your long-term financial security, according to financial advisors. And don’t be afraid to seek professional help, adds Heider, because the stakes are high in making the right financial choices.
“It’s especially critical if the spouse hasn’t worked outside the home, and what’s even more perilous is if that person hasn’t taken care of the finances. This spouse is going to receive half of a pension plan and does not know what to do with it,” says Heider.
If your spouse receives a pension, you can claim part of it in the event of divorce. According to Pension Rights Centerpensions earned during a marriage are generally considered joint property, although how they are divided and whether or not an ex-spouse is entitled to survivor benefits are decided in state courts.
Strategically use real estate assets
If you own a home, selling might be your best decision, experts say. As painful as it can be to leave a place you might have lived in for decades, emotions shouldn’t dictate real estate decisions.
“The house is only a useful resource for retirement if it’s sold and that money isn’t used immediately,” Sanzenbacher says. “What people usually do with their homes is nothing. People generally retire into the house they’ve always been in, and they tend not to use that asset for retirement at all.
“The fact is, a lot of times people can’t afford the house at some point,” says Cindy Hounsell, president of the Women’s Institute for a Secure Retirement. “I think they don’t pay attention to what needs to be done around the house,” she says, pointing out that big expenses like a new roof or a new heating system can be a huge financial burden in the coming years. immediately following a divorce. Plus, you want to be able to time the sale of your home, instead of having your hand forced by mounting expenses or a health emergency.
“I think the most important, strategically, is to go to a place where you can age successfully where there are services, where there are doctors’ offices nearby,” Sanzenbacher says.