Retirement and divorce: What you need to know
What happens to retirement funds in divorce depends on steps you take to outline your goals and short- and long-term plans.
Divorce affects every aspect of your life, and it can be especially challenging to your finances. The average divorced household has a 30% lower net worth than a non-divorced household and a 7% higher risk of not having enough money to last through retirement.
Because divorce can create both long- and short-term financial planning challenges, it's important to think through what happens to retirement funds in divorce and figure out how to build up your own safety net with a new estate plan. Follow these tips to navigate divorce and retirement planning.
Assess the post-divorce financial landscape
Pension and retirement accounts are considered community property in many states, and contributions made during marriage may be split 50-50. Ask your attorney what happens to retirement funds in divorce settlements where you live. Also, take stock of other ways divorce may affect your new budget. Will you pay or receive spousal or child support? Will your insurance expenses change? Will you have ongoing attorney fees? Will separate households increase your living expenses?
Recalculate your retirement goals and needs
With your new budget and remaining retirement assets in mind, recalculate how much money you need to retire. Tailor your career and savings plans appropriately. Younger people may have time to save and make up for losses. Those who divorce mid-to late-career, however, may need to find ways to reduce expenses and increase income or delay retirement.
Consider your retirement saving options
Divorce is an opportunity to reevaluate where you put your retirement dollars. Employer-offered retirement plans are a logical choice, especially if they offer a matching contribution. Traditional and Roth IRAs both offer tax advantages.
Don't forget healthcare
Medical expenses can quickly drain your retirement savings as you age, and Medicare doesn't cover long-term care. Talk to a financial advisor about long-term care insurance, which may help you preserve more of your wealth. A health savings account (HSA) could also be a smart way to save for future medical expenses.
Divorce can have a significant effect on your finances, but it doesn't have to derail your retirement plans. Thoughtful planning and smart choices after divorce can help you quickly rebuild a bright new future.
