Divorce and Retirement

October 02, 2020

Divorce and Retirement

As you work your way through a divorce, it is extremely important to rebuild your financial plan, including looking at how divorce effects your retirement. During a marriage we often get used to having two incomes, two sets of employer benefits, multiple retirement accounts and complementary Wills for end-of-life decisions. I cannot stress enough how important it is to make sure you as an individual and a divorcee are on track to retire.

 

Beginning Your Retirement Assessment

As you work through a divorce it can be very difficult to determine whether you are on track for retirement. Until the final decision on property division, you may not have a clear idea of where you stand. Once the property division, any child support or alimony are decided, and after you have the divorce decree in hand, you can begin to evaluate your own readiness for retirement based on your goals. However, one of the most important parts of financial planning is evaluating your spending. A financial plan built on a spending number that is too high or too low is exactly like the very cliche saying, “garbage in, garbage out.” I would encourage you to begin watching your spending as you begin working through a divorce. You will want to have a good gauge on what your normal spending is versus what is out of the norm; such as costs to furnish a new home, moving, and expenses related to attorneys or other professionals. Having a good expense number for your financial plan is, in my opinion, the key driver to making sure that your financial plan has a solid footing to begin the analysis.

 

Retirement Considerations After Divorce

As you begin to think about your retirement, I would challenge you to think about when you might want to retire some day and the life situations and costs involved you will encounter between now and that point.

 

·         Health Insurance Costs

Keep in mind with current laws and increasing health insurance costs due to age bracketing, if you want to retire before age 65, you need to plan ahead for paying a significant amount of out-of-pocket health insurance premiums before you ever go to the doctor. Once you reach age 65, you will be eligible for Medicare where there will be a little more flexibility with healthcare-related costs.

 

·         The Cost of Raising Children

Consider who you will have at home to care for and how much you can feasibly put away between now and retirement. Raising kids is expensive, and as a mom I can speak firsthand to the costs of daycare, school, summer care, activities, and more.

 

·         Social Security and Work History

You may want to consider your work history. Did you know that Social Security has a multitude of ways that can be taken based on your current and past financial situation? For example, if you were married more than 10 years you may have a different set of rules that apply to you, than someone who has never been married when it comes to Social Security. For example, let's say that you were married for 30 years as a stay-at-home spouse for the majority of your adult life. Even though you find yourself working now, your ex-spouse may have a higher earnings history than you, and/or you may not have enough work credits to qualify for Social Security (depending on how long you work). You may have the ability to draw some spousal Social Security as well. If you were married for greater than 10 years, I would encourage you to call your local Social Security office to discuss your options and potential benefits.

 

You also should consider the fact that Social Security could change. I encourage many of my clients, especially my younger ones to save close to 20% of their gross income, between their contributions and their employers. Is that a big number? Absolutely. However, a lot can change between now and retirement and having less reliance on Social Security as an income source is something that personally gives me more peace of mind.

 

·         Investment Mix

 

You should also evaluate how your investments are allocated and whether what you had set up during your marriage is still appropriate for you. Walking through a risk tolerance questionnaire and comparing your asset mix to your desired risk level can be eye opening, once you are making the decisions on your own.   Remember though, you have likely be advised NOT to make changes until you have the finalized divorce decree in hand. 

 

A few other things to consider include looking at your specific retirement accounts, as well as those of your soon to be ex-spouse as you are working through divorce settlement discussions:

  • Does one of you have a pension?
  • Do you have a 401(k) your employer contributes to and what amount of your paycheck is allocated to it?
  • Do you have any type of Deferred Compensation Plan available? (If you’re not sure what that is, let's walk through your employer benefits and help you understand what is and is not available.)

 

Don’t Put Off Retirement Planning After a Divorce

As you experience your new life post-divorce, I would reiterate how important it is to evaluate how your retirement funds are invested and whether you are putting enough away based on your own goals and life situation. This includes considerations for potential Social Security income and the fact that it could change in the future. I would also encourage you to think about your life situation and priorities, such as raising children. Call me today at 605-306-3248 or email me at srandgaard@wradvisors.com to set up a time to discuss your retirement planning needs.

 

 

This is meant for educational purposes only.  It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions.  Waddell & Reed and its representatives do not offer legal advice.  (09/20)