Imagine you’re in your early 50s. You’ve worked for nearly 25-30 years and own cars, homes, maybe even a boat. The children are finishing college, and you can almost see the light at the end of the tunnel—retirement! And then you go through a divorce. You thought you’d be test-driving your retirement plan. Instead, you’re starting over with about half the assets you previously had.
If this hits close to home, you’re not alone. Investors often seek out advice after a significant life change. Although people don’t always equate life events as money events, any major change like a birth or adoption; death of a spouse or parent; marriage or divorce; and a new job or even lost job almost always necessitates a discussion with your financial adviser. Your financial goals have fundamentally changed, as you’re no longer saving for retirement for two. You also may have also lost what you thought would be your forever home and perhaps benefits you had through your spouse’s insurance.
Your first steps should be re-establishing your emergency fund and understanding your household cash flow now that you’re single. You may find you have to cut household expenses like house cleaning or landscaping services. If you incurred credit card debt during the divorce process, transferring balances to a card with a lower interest rate could help you pay it off sooner.
Once you have your cash flow and lifestyle under control, you and your adviser can work on cash flow projections to see how your current spending and savings will affect your retirement goals. This step will help you determine if you need to save more, work longer, or downsize your retirement goals. Thankfully at 50 and older, you can make catch up contributions to 401(k)s and IRAs. You will also want to rebalance your investments to align with your new goals. Your allocation between stocks, bonds, and cash and even your diversification between Large-Cap, Mid-Cap, Small-Cap, and International stocks will likely need rebalancing; especially if you split funds with your ex-spouse according to the divorce decree.
You will also want to review your taxes. Now that you’ll be filing as a single taxpayer, you may want to explore more ways to save pre-tax, such as deductible IRAs or the use of flex spending or health savings accounts. You should also re-evaluate your insurance coverages. If you’ve been paying for life insurance, you may not need it on yourself since it is most often used to protect income. If you receive alimony or child support payments, you may need life insurance on your ex-spouse to safeguard those payments.
Finally, do not forget to update your estate plan. Your Will, beneficiary designations, and jointly titled accounts may name your ex-spouse as your heir, which you may no longer want.
Divorce can be a difficult time both emotionally and financially. Even if it happens later in life, there is still time to recover and take control of your finances with the help of a trusted adviser.