Divorce can be one of most challenging experiences you may ever face, but it's important to remember that there's always a light at the end of the tunnel. While divorce may present you with some financial difficulties, there are steps you could take to help ensure your future is protected. You've worked hard to get where you are today and taking steps to help ensure your golden years are secure could be one of the greatest gifts you give yourself.
Divorce & Retirement
Divorce and retirement planning can be difficult, but taking steps to plan for tomorrow could help you move forward in life with confidence. Consider taking some time to picture your ideal retirement lifestyle: Where would you like to live? How would you like to spend your time? What are your hopes and dreams for the future? What steps could you take now to ensure that you will live the life you want in your golden years? Life may have worked out differently than you anticipated but working toward your goals could help give you a sense of security for the future.
The financial implications of divorce can be numerous and complicated, but a firm understanding of your unique financial situation could help you effectively plan for retirement. Your divorce attorney worked closely with you to reach an agreement with your ex-spouse, and you may now have other financial considerations to factor into your budget, such as alimony or child support payments.
For those who may be starting over financially, it may be tempting to take a hardship withdrawal from your 401(k). These types of withdrawals have many restrictions, and there must often be an immediate and heavy financial need present. (In other words, you have no other way to meet the financial need). While it may provide additional income today, it's important to consider the long-term impact this could have on your retirement savings. Taking a withdrawal would mean this money would no longer grow and earn compound interest — and may be subject to additional taxes and a 10 percent penalty if you have not reached age 59 1/2, according to the Internal Revenue Service (IRS). It's also important to note that you cannot contribute to your plan for six months after taking a hardship withdrawal.
A Divorcee's Guide for Tomorrow
Once you're armed with information about your unique financial situation, you could take steps that could help you establish a healthy relationship between your divorce and retirement savings.
- Consider downsizing: Whether you own your own home or rent, moving into a smaller space could help make a big difference in your budget. A smaller space could reduce your rent or mortgage payments, as well as your monthly utility costs. Downsizing could help save you months of pinching pennies — and help you put money aside for your retirement.
- Negotiate a salary increase: Depending on where you are in your career, consider evaluating your current salary and possibly negotiating a raise with your employer. A salary increase — or even a promotion — could make it possible to increase your savings, even in the midst of a divorce.
- Create a new budget: Are you still spending money like you have a spouse to share the bills with you? Analyze your individual income and compare it to your current expenses. If there's negative cash flow, finding ways to cut back could help you get on solid ground. If you see a positive difference, however, you could use these extra funds to increase your retirement savings.
- Build an emergency fund: Even if your budget changes dramatically after a divorce, saving money for a rainy day could help you stay on track with your long-term goals. Something as small as a flat tire or as big as a trip to the emergency room could throw your planning off track — and an emergency fund could give you a financial buffer for the unexpected.
- Speak with an expert: If you're not sure how to adjust to your new standard of living, consider speaking with a financial representative who could help you with your retirement planning. Going through a divorce is often a challenging experience, and it can make financial decisions even harder. A qualified opinion could help keep you from stumbling around in the dark.
Divorce can be trying, both emotionally and financially. As hard as it may be, however, it's important to consider your plans for retirement as you navigate your new life. Establishing a foundation for tomorrow could help you remain confident as you move forward.