Getting divorced can throw a wrench into your financial planning. And if you’re already retired, it might feel like your safety net is falling away. The good news is that there are a number of concrete steps you can take to shore up your finances, along with options you might have to keep yourself on sound financial footing if you suddenly find yourself single in retirement.
1. Run a Financial Diagnostic
You can’t start any financial process without knowing where you stand. A financial diagnostic will outline what you have, what you need, and where you should be heading. Begin by collecting data on all of your accounts, from your checking and savings accounts to your brokerage accounts, IRAs, 401(k) plans, or other retirement accounts you might have, such as a 403(b) or 457.
On the other side of the ledger, include your liabilities, such as your home mortgage, credit card debts, auto loans, personal loans, or other money you owe. These documents form the basis of your financial planning.
2. Calculate Your Net Worth
Once you have all your financial information in front of you, calculate your net worth by subtracting your liabilities from your assets. Although there are more advanced ways of calculating net worth, this simple version can give you a snapshot of where you stand overall. By the time you are retired, you likely have a positive net worth, but if this number is negative, you might have to take more immediate steps to lower the risk of insolvency.
3. Educate Yourself
Thomas Jefferson often used the Francis Bacon phrase “knowledge is power,” and it applies to finances as much as anything. If you weren’t an active participant in your finances when you were married, you might find yourself in a position where you don’t really understand your financial situation.
Fortunately, there has never been an easier time to pick up a rapid education in finance thanks to the ubiquity of financial news on TV and the prevalence of financial information from trustworthy sources on the internet. Consult reputable sites and sources to start your education.
4. Make a Budget
Once you have the lay of the land financially, draft a simple budget with an easy-to-use template. A budget will itemize where your money is coming in and where it’s going out. Doing this is crucial if you’re trying to maintain financial independence. A good budget outlines in black and white just where you might need to trim your spending. If you’re running a surplus, which is a great thing, a budget will show how much you can allocate to your savings.
5. Pay Yourself First
An important lesson in financial planning is to always pay yourself first. This means that when income hits your account, a portion of it should immediately go to savings before you start carving up the rest for bills and other expenses.
Paying yourself first is an exercise in financial security, as you’ll be adding to your savings every month regardless of your other financial obligations. Human nature being what it is, if you spend your money on other things first, you’re likely to discover that you have no money left when it comes to your savings bucket.
6. Build an Emergency Fund
When you pay yourself first, a portion of that allocation should go to an emergency fund. Many financial experts consider an emergency fund to be the first step in a responsible financial plan. Surprise expenses pop up all the time, and without an emergency fund to cover things like a car repair or a leaky pipe, you’re likely to take money from other needs, such as your long-term investments. An emergency fund gives you peace of mind that a sudden expense won’t derail your daily financial life.
7. Take Social Security Early
If you were born in 1937 or earlier, full retirement age is 65. This doesn’t mean you have to wait until your full retirement age to collect Social Security, however. Workers can claim retirement benefits from Social Security as early as age 62.
The tradeoff is that your benefit is reduced from the amount you’d receive at full retirement age. For those born in 1937 or earlier, the reduction is 20%, scaling up to a 30% reduction for those born in 1960 or later. If you need income to stabilize your finances, however, you might consider starting your benefits early.
8. Learn About Social Security and Divorce
Social Security isn’t simply a retirement program. Even if you never worked a day in your life, if you are married to a spouse who receives benefits, you are entitled to benefits as well. What some people don’t know though is that even after divorce, an ex-spouse can still be entitled to Social Security spousal benefits.
To qualify, you must have been married for at least 10 years, you must be at least 62, your ex-spouse must be entitled to benefits, and your spousal benefit must be larger than the one you’re entitled to on your own accord.
9. Fund Your 401(k)
As long as you are still working — even if you are over age 70 1/2 — you can continue to fund your 401(k) plan, if your company offers one. A 401(k) can be one of the best ways to provide financial stability in retirement, because your money goes in on a pre-tax basis, your earnings grow tax-deferred, and you can often get a company match on at least a portion of your contributions. If your financial diagnostic indicates that you don’t need money in the immediate future, maximizing your 401(k) can pay long-term dividends.
10. Start a Roth IRA
Even if you have access to a 401(k) plan, funding a Roth IRA could make sense for your long-term financial plan. For starters, you don’t ever have to take required minimum distributions, unlike 401(k) and SEP-IRA plans, which require these RMDs beginning after you turn age 70 1/2. Additionally, your contributions and earnings grow tax-free, and you won’t have to pay tax when you ultimately take withdrawals.
If you don’t participate in a 401(k) plan, a Roth IRA might make even more sense, as it provides easy access to tax-advantaged savings.
11. Explore Long-Term Care Options
After divorce, some of your financial protections might fall by the wayside. If you received long-term care insurance from your spouse’s employer, for example, you might no longer have coverage. Similarly, if you intended your spouse to personally care for you in your old age, you might have also lost your caregiver in the divorce.
Long-term care insurance is an option that can help provide for those years in the absence of your now-former spouse. But premiums rise sharply the older you get, so start looking sooner rather than later.
12. Hire Professionals
If your financial situation is simple and straightforward, you might be able to get a handle on things yourself after some analysis, calculation, and budgeting. But for more complex cases — or for people who just don’t want to exert the time and effort into managing their own affairs — a team of professionals might make more sense.
In addition to financial advisors, who can handle your investments and retirement accounts, you can hire CPAs for your accounting and tax affairs and attorneys for more advanced issues such as estate planning. Some professionals even work specifically with divorced women, and you might want to seek them out if this applies to you.
13. Update Your Will or Estate Documents
In most cases, particularly in community property states, spouses often name one another as their beneficiaries in wills and estate planning documents. After divorce, you’ll likely want to change those designations immediately.
But estate planning documents often go far beyond the disposition of financial assets to spouses. Some assign power of attorney for various healthcare matters to spouses, for example, including the ability to make life-or-death decisions such as whether or not to sustain life support. Examine your documents and make sure they express your current intentions.
14. Update Your Financial Accounts
When you divorce, you should update your important financial documents as soon as possible. The most obvious accounts to update are any joint checking or investment accounts you have with your ex-spouse; however, you likely have more connections you’ll want to update than you imagine. Life insurance policies and retirement accounts have beneficiaries, and in many cases, your beneficiary is likely your ex-spouse. You’ll also want to look at things as basic as emergency contact cards.
15. Review Your Portfolio
If your financial situation changes in your divorce, for better or worse, you’ll likely have to update your portfolio allocation. A good portfolio allocation is based on your investment objectives, risk tolerance and time horizon.
Your investment objectives might change dramatically based on the circumstances of your divorce. If your ex-spouse was the breadwinner of the house, for example, you might have the need for more income. If you end up with more assets after your divorce, you might be able to handle more risk in your accounts.
16. Do Your Own Taxes
You can always hire a CPA to help you file your taxes, but learning how to do it on your own is a big step towards financial independence. Doing your own taxes will help you see the complete picture of your financial situation, and it will save you some money to boot. Don’t be afraid to use a software program to help you — tax software can help prevent you from making simple mistakes, like math errors, and you’ll still have to review and understand all of your financials to successfully file.
17. Factor In Alimony, If Applicable
Divorce after retirement can cause many financial changes, especially when it comes to alimony. Alimony is a court-ordered payment from one former spouse to another. But law regarding alimony payments after retirement vary from state to state.
In some cases, a former spouse is no longer liable for alimony payments after reaching full retirement age. Because laws vary and can get complicated, if you’re either the payer or the recipient of alimony, you might want to consult with a lawyer if you are divorced in retirement.
18. Check Your Credit
Although you can separate much of your financial life from your ex-spouse upon divorce, credit is not one of those areas. Any joint debt that you incurred with your spouse while married is still a joint responsibility of you both. In community property states, you might even be liable for the debt of your partner, even if you had no knowledge of it.
You’ll want to check your credit report to see the full extent of your debt obligations. If you intend to borrow on your own in the future, as a financially independent individual, it will be important to have a good credit score.
19. Update Your Insurance Policies
While married, you might have shared numerous insurance policies with your spouse, including auto, home, health and life insurance. All of these policies should be amended, updated or canceled, depending on your specific circumstances.
In many cases, your premiums might change significantly — either up or down — once you and your spouse each have your own individual policies, so that is something you should be prepared to budget for. At the very least, be sure to update the beneficiary sections of your policies to eliminate your ex-spouse.
20. Don’t Forget the Little Things
During divorce proceedings, it’s easy to focus on the big-ticket items, such as homes or retirement accounts, and miss the little ones, like car registrations. If you weren’t the spouse in charge of the finances during the marriage, you might not even know all of the little things that you were paying for as a couple. Comb through your banking registries and credit card statements for things like recurring charges to streaming services so that nothing gets overlooked, and cancel any services you no longer need.
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