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Adjusting Your Retirement Plans After a Divorce

May 15th, 2024 | 3 min. read

By Advance Capital Team

divorced couple

For many couples, no amount of therapy, date nights, chocolate or flowers is enough to save a marriage. When divorce becomes the only option, it’s important to start planning because the process is often emotional.

That’s especially true when it comes to handling the financial aspects of post-divorce life. You can get caught up in all the legal negotiations and miss things that eventually turn into costly mistakes.

Remarkably, divorce rates among older Americans are on the rise. Since 1990, the rate has doubled for those over 55 and tripled for those over 65, according to federal data.

This phenomenon, often referred to as “gray divorce,” has risen even as younger demographics see declines in divorce rates. Financially, the repercussions are significant: a study found that women aged 50 and older who divorced saw their standard of living drop by 45%, while men experienced a 21% decrease.

Divorce brings many changes, and among the most crucial yet often overlooked is your retirement plan. Sure, the process can seem overwhelming, but with careful and strategic planning, you can work toward a happier financial future.

Here’s how to address the essentials of post-divorce retirement planning.

This article covers:

  • Social Security benefits
  • Shared retirement accounts
  • Budgeting
  • Beneficiaries
  • Retirement needs and goals
  • Taxes and insurance
  • Investments
  • Emergency fund
  • Professional financial help

Understanding Social Security benefits

Post-divorce, your Social Security benefits may look different, especially if your marriage lasted 10 years or more. You might be entitled to receive benefits based on your ex-spouse’s work record, provided you haven’t remarried and both you and your ex are at least 62 years old. The benefit amount won’t impact your ex’s benefits, but it’s capped at 50% of their full retirement amount.

Untangling shared retirement accounts

Dividing retirement accounts is a significant step. Whether it’s a 401(k), IRA or other retirement savings, the division should be detailed in your divorce decree. You might need a Qualified Domestic Relations Order (QDRO) to split these accounts without facing tax penalties. Consulting with a financial adviser or an attorney who specializes in divorce can help navigate these complexities.

Budgeting for one

Your financial situation will undoubtedly change post-divorce. Creating a new budget is essential. Start by assessing your income sources – employment, alimony, child support, etc. Then, list all your monthly expenses, prioritizing essentials like housing, utilities and healthcare. Adjust your spending to ensure you can continue saving for retirement.

Updating your beneficiaries and estate plan

After divorce, ensure that you update the beneficiaries on your retirement accounts, insurance policies and any other financial instruments. If not, these might still go to your ex-spouse should you pass away. Additionally, revise your will and any powers of attorney to reflect your current wishes.

Reevaluating your retirement needs and goals

Post-divorce, get a fresh start on your retirement needs and long-term financial goals, especially as an older adult. That’s because gray divorce can severely impact your retirement accounts. You might find yourself needing to work longer or adjust your retirement lifestyle expectations.

Consulting with a retirement planner can be vital in reassessing your strategies and investments according to your new financial circumstances. For instance, you may need to start saving more aggressively to replenish your savings.

Managing taxes and insurance

Navigating taxes post-divorce can be tricky, especially when it involves multiple income sources, alimony or child support. Also, you will have to reassess your health, life and disability insurance coverages to ensure they align with your current needs and budget.

Adjusting your investment strategy

A major life event, like divorce, can be an opportunity to reexamine your investment strategy, especially as you may be managing a single investment portfolio moving forward. Your risk tolerance could have shifted, as you might find yourself more or less risk-averse than before. It could be the time to consider diversifying your investments to mitigate risks and potentially enhance returns.

Consulting with a financial adviser is advisable, helping you make changes to your portfolio that align with your new goals.

Establishing an emergency fund

If not already in place or depleted from the divorce proceedings, build an emergency fund. Aim for a reserve that covers 3-6 months of living expenses. This fund can be a financial lifeline in unexpected situations, helping you avoid dipping into your retirement savings.

Partnering with a financial adviser

Divorce has many moving parts, including handling assets like cash, retirement accounts, investments, real estate, and business equity. Your attorney may not be fully versed in the nuances and tax implications of these assets.

This is where a financial adviser can help, providing guidance on how the divorce impacts your current and future financial well-being. Even throughout the divorce proceedings, an adviser can help identify the assets you are entitled to, navigate tax rules and manage deadlines for transferring funds.

To ensure your best interests are prioritized, consider partnering with an independent, fee-only adviser who is bound to act as a fiduciary at all times.

Bottom line

Divorce is a challenging life event that necessitates a thorough review and adjustment of your financial plans. Hopefully, these post-divorce retirement planning steps help you see that this is not necessarily the end of something, but rather the start of something new, something that can be better.

If you are going through a divorce or other major life event and need financial support, schedule a free consultation with an Advance Capital Management financial adviser.

Advance Capital Team

Advance Capital Management is a fee-only RIA serving clients across the country. The Advance Capital Team includes financial advisers, investment managers, client service professionals and more -- all dedicated to helping people pursue their financial goals.