4 Tips for Retooling Your Retirement Plan After Divorce

Getting divorced can pack an emotional punch but your finances can also take a serious hit, particularly where your retirement outlook is concerned.

"Someone who has recently gotten divorced has just been through a life-changing event that will have a significant impact on all areas of their retirement planning," says Jay Ferrans, president of JM Financial & Accounting Services in Southfield, Michigan.

According to a 2014 report from the General Accounting Office, 11 percent of divorced men and 18 percent of divorced women over the age of 65 live in poverty. Women tend to face the biggest struggle in saving for retirement after divorce.

Keeping your retirement plans on track after a divorce may be challenging but it's not out of the question. Your long-term financial future ultimately hinges on making the right decisions when you're saving for retirement solo.

[See: 10 Tips for Handling Investments and Divorce.]

Define your starting point. The first step in revamping your retirement plan after a divorce is taking stock of where you are, according to Stacy Francis, CEO of Francis Financial and founder of New York nonprofit organization Savvy Ladies.

"Once your divorce is final and accounts have been divided, it's important to look at where all your money is," Francis says.

For example, is the bulk of your savings in a 401(k) or another employer-sponsored account? Do you have assets in an IRA or a pension plan? Understanding what kind of assets you're working with, says Francis, is the first step toward regaining your financial footing.

The next part of the equation is figuring out how much of a shortfall exists between your current savings rate and your ultimate retirement goal, says David Fink, a certified divorce financial analyst and regional vice president of Halliday Financial in Sarasota, Florida.

According to Fink, running the numbers can lead to a few different conclusions, based on the specifics of your individual situation.

"First, you might realize that you don't need to save any more. On the other hand, you may realize that what you need to save isn't realistic, so you either need to decrease spending or plan on working longer until retirement," Fink says.

Rebalance wisely. Rebalancing your portfolio on a regular basis is important but it becomes even more so for divorcees, says Lisa Hutter, senior director of wealth planning for Wells Fargo Private Bank in Austin, Texas.

"Rebalancing your portfolio after a divorce is critical because your risk tolerance and optimal asset allocation can change," Hutter says.

Not only that, but your goals may shift as the result of a divorce as well, something that you should talk over with your financial advisor if you have one. Hutter notes that it's also a good time to consider whether your current financial advisor is someone you want to continue working with.

"You may discover a lot through the discussion [of your portfolio], including whether or not your advisor is the right person to grow with you into retirement as a divorcee," Hutter says.

Kathleen Grace, managing director at United Capital in Boca Raton, Florida, says that your cash flow and current expenses should play a role in determining your asset allocation going forward.

"If you were the breadwinner, you may be able to increase risk in your portfolio if you're no longer supporting your ex-spouse," Grace says.

The same is true if you have disposable income each month that you're able to save and three to six months' worth of expenses tucked away.

[See: 12 Steps to Protect Your Money in Divorce.]

On the flip side, however, you may be less able to withstand a market downturn if a divorce left you with higher expenses or a smaller emergency fund. In that scenario, you'd want to reduce risk in your investments until your expenses are pared down and your cash cushion increases.

Start planning now for medical care. The biggest mistake divorcees make in planning for retirement is failing to take longevity into account, says Cathy DeWitt Dunn, a certified divorce financial analyst and president of DeWitt & Dunn in Dallas, Texas.

"Today's retirees should plan on living 30 to 35 years in retirement, and that means massive health care expenses on top of ordinary living expenses," DeWitt Dunn says.

Jody Dietel, chief compliance officer at San Mateo, California-based WageWorks touts the benefits of a health savings account for divorcees who are worried about having to dip into their retirement savings to cover medical expenses.

"An HSA can act as a 401(k) for health care," Dietel says.

Consumers can sock away pre-tax dollars into their HSA and any money you take out for medical expenses is tax-free. Starting at age 65, you can take withdrawals from an HSA for non-medical reasons without a penalty. You'll just pay regular income tax on distributions.

Richard Lavina, co-founder and CEO of Taxfyle, suggests divorced savers consider the benefits of long-term care insurance if they're concerned about a serious health issue draining their wealth.

"While the premiums can be pricey, the alternative can be financially detrimental," Lavina says.

The younger you are when purchasing long-term care insurance, the lower the premiums will be so whether to buy this coverage is a decision you shouldn't put off. Lavina cautions that not everyone needs long-term care insurance, however.

"People with modest assets of about $100,000 will likely qualify for Medicaid, which does cover custodial care," Lavina says.

Think about Social Security sooner rather than later. Social Security benefits can help to fill some of the holes in your retirement plan and there are some special filing rules that divorced retirees need to be aware of.

If you were married for 10 years or longer, you may be eligible to receive benefits based on your ex-spouse's earnings. To qualify, you must be unmarried, aged 62 or older and your individual Social Security benefit based on your earnings history must be less than your former spouse's benefit amount.

Francis says divorcees can optimize their Social Security strategy by claiming their spousal benefit once they reach full retirement age, then switch to their own benefit once they reach age 70. This allows your Social Security benefit to grow for a few more years, since you receive an increase for each year you delay taking benefits.

Ferrans recommends consulting an expert if you're having trouble deciding when to take Social Security benefits or decoding the rules for spousal benefits. He also urges divorcees to remember that time is of the essence.

[Read: 7 Financial Steps to Take When Getting a Divorce.]

"The biggest mistake I see people make after a life-changing event like divorce is to do nothing. Don't procrastinate because you can never get back the time you waste," Ferrans says.



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