Whether you’re just starting out in an entry-level career in your 20s or preparing for the final years of your career in your 50s, retirement is one of the most important financial goals anyone can have at any point in their adult lives. Marriage is also another goal that many people share, but unfortunately, research has shown that 40% of marriages will likely end in divorce. But, how much does divorce hurt your finances?
This means your goals for marriage and retirement could potentially conflict with each other, as new research from Boston College recently found that divorce is almost as bad as the Great Recession when it comes to the impacts it could have on your retirement savings. Not only do you have to pay for lawyers and potentially take time off of work to deal with divorce-related matters, but you will also divide up your assets and pay all your bills on your own, without your spouse’s income to supplement your income.
If you’ve been struggling with your marriage and counseling isn’t an option (or hasn’t helped), then consider the following negative implications before proceeding with divorce and how divorce hurts your family’s finances.
Loss of Income Risks
This is a pretty straightforward downside to opting for divorce overworking things out: you’ll lose an income source. For dual-income households, this means you’ll now be making significantly less money on your own and you may have to pay alimony to your spouse if you were the higher (or sole) income-earner. While some cases allow for alimony payments to cease once you retire, not having a second income to cover your expenses can seriously hinder your ability to save for retirement in the meantime.
Furthermore, it’s worth factoring in the cost-of-living in your area before deciding whether to divorce. If you live in an expensive area and cannot leave your job for a cheaper area, then how will you plan to afford rent and other necessary expenses on a single income? Granted, there are some financial benefits of divorcing – such as accessing your retirement funds earlier without paying the withdrawal penalties – but the impacts on your retirement savings likely won’t outweigh these minor benefits.
If you ultimately proceed with the divorce, then you’ll likely have to divide assets either based on common law or community property laws (which vary based on which state you live in). Most states are considered common law property states, which means something you bought during the marriage is yours to keep (and vice versa for your spouse). Meanwhile, community property law states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) splits assets acquired during the marriage 50/50.
Throughout the process of separating assets and debts, it’s extremely important that both sides remain transparent about financial information in order to avoid lengthy legal battles later on. This can certainly put a strain on your long-term savings, as you may have to part with many of the assets you were planning to set aside for income-earning during your retirement years.
For best results, hire a knowledgeable divorce attorney to help you protect your assets and income during and after the divorce.
Lower Net Worth
Having to divide your assets in the midst of a divorce means your personal net worth is also likely to decrease. As the aforementioned Boston College study found, intact families have an average net worth of $132,000 while divorcees have an average net worth of $101,000.
If you’re planning to use your assets for passive income streams in retirement, then you may need to work a few extra years to rebuild your nest egg after the divorce is finalized.
Strategies for Protecting Your Retirement
Staying in an unhappy, unfixable marriage is not a viable solution for many folks. Counseling certainly helps some couples, but it’s not a guaranteed fix for all of the interpersonal, financial and romantic problems that may occur within a marriage. For these reasons, “stay together to protect your retirement” is simply bad advice. Fortunately, it is possible to rebuild your finances after a divorce.
To focus on your personal needs and long-term financial goals, start by setting aside several hours to map out all of your financial information: assets, debts (individual and shared with your spouse), current budget and income (shared), future budget and income (on your own), projected costs of legal fees for the divorce, and any other information you can think of.
With a stable plan to work through your financial situation both during and after the divorce, your next step should be developing a future-oriented income strategy. This includes avoiding common retirement mistakes (such as retiring too early), setting aside more of your income into savings and investments (and getting a side gig to boost your income), cutting whatever unnecessary expenses you currently have, and researching ways you can make money during retirement in order to stretch your nest egg further without indefinitely postponing your target retirement date.
It’s not easy to save for retirement, especially if you’re going through a divorce. While there will be setbacks along the way, your retirement isn’t necessarily doomed, either. By coming to terms with the reality of your situation, planning out all of your finances, and devising new strategies for supplementing your income, you’ll be in a better position to meet your retirement goals than many other divorcees who didn’t plan ahead.
What do you think? How much does divorce hurt your finances?