When couples divorce, long-term financial priorities sometimes receive the least attention.
Many money issues are about immediate needs - where to live, how to handle everyday expenses and if there are kids, how to support their needs in two households, not one.
This is why retirement planning can face serious obstacles post-divorce. In marriage, a two-earner household has the advantage of splitting living expenses and pooling assets like retirement savings. After divorce, ex-spouses may walk away with their share of joint retirement assets based on how they negotiate that distribution.
However, returning to singlehood means taking on all housing, food, transportation and related costs alone. That generally means less money to save for retirement and other purposes. To assure a comfortable retirement, many experts advise individuals to save and invest over time so they can live annually on at least 70 percent of their pre-retirement income.
Divorce can be tough no matter what the circumstances, but best-case financial scenarios typically emerge from thorough, individualized pre-divorce planning. That generally requires each spouse to retain their own financial advisors much as they would their own legal counsel to assure an equitable split of assets and to set a basic road map for retirement and other investment goals going forward.
Retirement assets are generally split as negotiated along state and federal guidelines when marriages end in divorce. Qualified financial planners and attorneys can help clients negotiate a document known as a Qualified Domestic Relations Order (QDRO), which allows joint retirement funds to be split and deposited into new retirement accounts without adverse tax consequences for either party.
Once the divorce is finalized, it's up to each former spouse to recalibrate their retirement planning based on current income status, years until retirement and the post-divorce lifestyle expenses they'll face in the future. Once that road map is set, it should be reviewed annually or whenever a major life change (employment, remarriage or inheritance, for example) indicates a need for review.
Here are steps to reset one's retirement goals during those first months after a divorce is finalized.
Establish - or re-establish - a personal finance team. Most divorcing individuals are advised to get their own qualified financial professionals to evaluate every aspect of their pre- and post-divorce finances before any final documents are signed. It's appropriate to seek new referrals with friends or family or to consult the following resources:
- The Certified Financial Planner Board of Standards
- The Association for Financial Counseling and Planning Education
- The Financial Planning Association
- Your state CPA society
Make a budget. Divorce is a stressful, emotional time for many couples and families. Spending priorities can change when individuals establish new households. Newly divorced spouses should track all new spending diligently so they can reset their budget for retirement. Keep in mind that overspending can become a problem as former couples establish separate residences. Qualified financial advisors can review a client's budgeting strategy to make sure as much money goes to savings as possible.
Take a fresh look at all retirement investments. Even with pre-divorce financial counseling, it is important to review one's retirement investments once the divorce is finalized. Alone or with a qualified financial professional, evaluate whether the asset allocation still fits retirement goals. If one's 401(k) or employer plan administrator does not have a calculator to help estimate how accounts will grow under certain investment scenarios, refer to Bankrate.com's various retirement calculators for help.
Review Social Security benefits. Most experts say Social Security income should be viewed as a minor contributor to a person's overall retirement funds. That is why most urge individuals to wait as close to age 70 (the age when Social Security benefits stop increasing year-to-year) to start drawing payments. Check the Social Security Administration's Delayed Retirement Benefits page for a discussion of how and when to take benefits. Also keep in mind that retirees married 10 years or longer who have not remarried may be entitled to Social Security benefits on their ex-spouse's record if they meet certain requirements. It is best to discuss this option with qualified financial and/or tax advisors before making this move as there may be tax consequences.
Be honest about new financial limitations. If a serious retirement savings shortfall emerges after divorce, it's important to reset your financial priorities. That may mean considering cutting back on family support or other extras close relatives have counted on in the past. It is important to talk openly with family members at the start about this, particularly if it may affect a child's college tuition or living expenses for an elderly relative. Most experts suggest that retirement planning must continue because such assets may prevent major financial problems later on.
Bottom line: Starting a new life after divorce introduces many financial challenges. Retirement may seem far away, but it should stay at the top of the list. It's important to get retirement advice before and after the divorce is final.
Jason Alderman directs Visa's financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney
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