How to Rebuild Your Finances After Divorce
A divorce crushes more than your emotions. Whether you are near retirement or at the peak of your career, a divorce means it is time to rebuild your finances, too. If you are considering a separation, have already separated, or the divorce is final, now is the critical time to get objective advice from a fiduciary financial advisor in DTC.
You’ve heard the stories, and the country songs, about how a devastating divorce impacts lives and net worth. Often, especially early in life, a divorce means starting over from scratch financially. Later in life, or if you prepared better, you might have a head start.
Rebuild, little by little, using advice from your fiduciary financial advisor in DTC
Psychologically, relinquishing your retirement assets may feel like a greater violation than divvying up joint accounts or a house.
You require legal documentation when you split your pension, both your IRAs or 401(k)s. You can agree to a straight 50/50 division or decide on more creative methods. If your incomes and savings are close to equal, you can just walk away without dividing anything. Regardless, both of you each end up with less than you expected if you spent the rest of your lives together.
The Center for Retirement Research at Boston College, divorced households have about 30% lower net worth in the US than in non-divorced households. And they have a 7% greater risk of not having adequate funds to last through their retirements.
The price tag of divorce ranges from a few hundred to several thousands of dollars. The average contested divorce costs between $15,000 and $30,000, according to Forbes.com. Some researchers estimate that the individual spouses must increase their income by 30% to maintain the standard of living before the divorce.
Rebuilding a retirement nest egg is complicated by the contribution restrictions on qualified retirement plans.
For example, you agree to a $250,000 transfer from your 401(k) in the divorce. But the contribution limit is just $18,500 per year, or $24,500 once you are over 50. Plus, Roth and IRA contribution limits are $5,500 per year, with more restrictions based on your age and income. So, pensions are entirely walled off.
A Financial Rebound Strategy
The younger you are, the easier your financial rebound. You still have the benefit of compounding. Continuing to max out contributions in your retirement plans is an excellent place to start. But also stashing additional cash in a taxable investment account often makes up the difference. Build up your emergency fund, and be sure to set aside savings. Look five years down the line, and you’ll see a growing balance in your 401(k) and a solid investment in your taxable account.
Of course, this is general information, so consult with your fiduciary financial advisor in DTC to advise you for your specific situation.
The Receiving Spouse
If you are on the receiving end for retirement accounts, you may find more complications, especially if you are at or near retirement age. You can’t contribute to a 401(k) or an IRA unless you earn income, and Social Security doesn’t count.
A divorce will upend your financial situation, making rebuilding necessary. So, focus on the future by talking to a fiduciary financial advisor in DTC for objective advice on your situation.