Back on Track After Divorce
Getting your retirement plan back up and running after a divorce can be frustrating. You may have had to divide your retirement accounts as part of the divorce agreement, and paying divorce expenses, such as lawyer fees, and supporting two separate households can wreak havoc on your finances. But don’t let your emotions cloud your judgment about your retirement plan.
Avoid these three common planning mistakes:
1. Spending more than you can afford to maintain your old lifestyle. After your divorce, your income may not be enough to support what the two of you could afford when you were married, so be realistic about your resources. Review your income and expenses. Keep your total housing costs under 35 percent of your income, and don’t discount the idea of renting for a while, even if you owned a house when you were married. Recalculate your retirement savings target—or set your budget to deposit 15 percent of your income into retirement accounts until you have time to calculate a more definite target.
2. Using money to shelter the kids from the pain of the divorce. Divorce is painful for kids and adults alike, but don’t get caught in a cycle of spending to try to make your kids feel better. Few families can break up and maintain the same lifestyle for each parent separately that the family enjoyed together. Don’t threaten your retirement security by overspending on your kids.
3. Making your investments too aggressive to try to catch up or too conservative because you’re worried about losing money. Don’t throw your asset allocation out of whack because you’re starting over with smaller retirement accounts and want to try to catch up quickly or because you’re new to investing and are wary of risk and losing money. The asset allocation you pick depends on both your time until retirement and how long you’ll live in retirement, as well as how you feel about risk. Go back through the exercise of calculating your asset allocation and make deliberate, thought-out changes to your new portfolio.
Full Account
I talk to a lot of people who have recently been divorced. Often, they’re surprised and frustrated about the long-term financial results of their decisions. Sometimes they agree too quickly to get the divorce process behind them. Sometimes they prolong the process needlessly and end up with huge attorney fees. Divorce can be expensive, and you need good legal counsel. But don’t be your own worst enemy by letting yourself get goaded into fighting for what you feel you deserve because you’re emotionally hurt beyond what a court is likely to award you or that you really need. A good way to keep this clear is to do a rough financial plan early in the divorce process to get a general idea of what financial resources you’ll need at the end of the process. When divorce settlements and negotiations start getting intense, refer to your long-term plan to remain focused.
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