Planning for retirement after a divorce

Divorce is, by definition, disruptive. Getting a divorce disrupts your family life and your social life. Often a divorce disrupts retirement plans.

People who go through a divorce typically see their net worth drop substantially. A new study (“How Does Divorce Affect Retirement Security?” – June 2018, Center for Retirement Research at Boston College) shows that the average net financial wealth of divorced households is $101,000, about 30 percent lower than the $132,000 held by non-divorced households. This means that households with at least one divorced spouse are 7 percentage points more likely to be unable to maintain their current standard of living after they retire, or 55 percent compared with 48 percent. (If that doesn’t sound like a big difference, consider this: the Great Recession of 2008-09 increased this “at risk” percentage by 9 percentage points.)

Divorce affects nearly half of American households: 44 percent of all households in 2016, married and single, had a previous divorce. The highest percentage was among people aged 50-59 at 55 percent, followed by age 40-49 at 46 percent and age 30-39 at 27 percent. By income group, 50 percent of low-income households had a previous divorce, followed by 46 percent in the middle-income range and 35 percent of highincome households, according to the study, which based these numbers on the Federal Reserve Bank’s Survey of Consumer Finances.

The short-term cost of getting a divorce starts with legal fees, which can be quite high, and major financial changes such as the sale of a house, which involves transaction fees and the potential for losses associated with current market value.

Ending a marriage requires a division of wealth, including retirement savings. Splitting up a 401(k) plan or an IRA involves tricky tax issues and other considerations and can result in losses related to transaction costs and market timing. More importantly, it’s difficult to earn back half the total. If your retirement nest egg drops from $400,000 to $200,000 overnight, the amount you can add back will be restricted by annual contribution limits. For a 401(k) plan, if you are over 50 you can contribute $24,500 a year, with far lower limits on IRAs. You have lost the benefits of compound interest, and it will take several years to make up the other half.

Finally, a divorce means two people will go from sharing expenses to bearing the costs of housing, utilities and other expenses separately.

If you go through a divorce, the first step afterward is to take stock and begin retirement planning all over again. A financial planner can help you determine the new value of your retirement nest egg and other assets, assess your income and investments, and come up with a target number for your retirement needs. You may need to find ways to increase your income and savings, reduce your living expenses, and adjust your investment portfolio to reflect a more aggressive strategy. Eric Tashlein is a Certified Financial Planner professional and founding Principal of Connecticut Capital Management Group LLC, 2 Schooner Lane, Suite 1-12, in Milford. He can be reached at 203-877-1520 or through www.connecticutcapital.com. This is for informational purposes only and should not be construed as personalized investment advice or legal/tax advice. Please consult your advisor/attorney/tax advisor. Registered Representative, Securities offered through Cambridge Investment Research Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors Inc., A Registered Investment Advisor. Cambridge Investment Research Inc., and Connecticut Capital Management Group LLC are not affiliated.