By Shelly-Ann Eweka
Besides the personal struggles some women face when they get divorced, many financial challenges also emerge. These financial challenges in the face of divorce can impact your daily budget, your retirement plans, and even what happens after you die.
An often-overlooked question when dividing marital assets is how to split retirement savings. In addition to working with divorce attorneys, talk to financial planners about including the assets received or lost due to a Qualified Domestic Relations Order (QDRO) in your retirement plan. QRDOs are not frequently used, but they help divide money set aside in a 401(k).
One of the most immediate changes, of course, comes after shifting from two incomes to one. Expenses that were easily affordable may now be out of reach, and it’s important that you don’t add debt during this transition.
If you need to cut your budget, there’s one thing you don’t want to cut: your retirement savings.
Divorced women must pay themselves first. Set up automatic investments for 401(k)s, IRAs, Roth IRAs, or annuities, which a growing number of workplace retirement plans now include as investment options. These will give you a stream of payments in retirement so you can have a lifetime income.
After you pay yourself first, build your lifestyle around your remaining available income. Those who do the opposite – who look to save or invest at the end of the month with “whatever is left over” – often never get started.
Do the Math
Some people might wonder why they should save money after their budget gets cut. They might be tempted to say, “I’ve got to find a new place to live, and I’m making so many other adjustments, so I’ll start saving for retirement as soon as I get back on my feet.”
Bad idea— you want your money to compound.
Let’s say you got divorced in 2011 and, at that time, you started saving just $100 a month for retirement. That’s $1,200 a year. After a decade, you would have invested a total of $12,000. If you look at how much the S&P 500 rose during that time, your investment return would be about $21,500, according to a historical investment calculator.
Now consider a different scenario. Let’s say after that 2011 divorce, you paused your retirement savings while coping with all the other lifestyle changes. Instead of immediately saving for retirement, you waited five years, but then you decided to double how much you save. Instead of putting aside $1,200 a year for 10 years, you invest $2,400 a year for five.
In both cases, a decade after your divorce, you would have invested a total of $12,000. But if you waited to start saving, your investment return would be about $16,000. That’s roughly 25% less.
It’s important to note that past performance is not a guarantee of future performance, but generally speaking, the sooner you invest, the sooner your money grows.
Besides having your contributions grow due to compounding interest, many companies match what you save for retirement. Here’s another calculation.
If you make $55,000 a year, and you save 3% of that salary, your company could match that 3% contributed. That’s $1,650 from you and another $1,650 from your employer. If you don’t save that much, you’re leaving free money on the table. Plus, the contributions you make for retirement may not be taxed.
Your retirement plan provider may offer online calculators so you can predict how much your account will grow throughout time based on varying levels of contribution. Being aware of your account’s future value can help reduce stress during a difficult life transition.
I can’t emphasize this enough: as you start over, you must craft a budget.
It’s important to differentiate needs – such as savings, rent or mortgage, utilities, groceries, and gas – from discretionary spending, such as restaurants, entertainment, and travel. Evaluate these expenses against your incoming cash flows, such as salary, alimony, and child support.
Free apps on your smartphone can automatically track your spending and identify different categories. You’ll be surprised about what you purchase! Identifying frivolous expenditures can help you see which ones make sense to cut. Here are some examples of things that may make sense to limit when crafting your new budget:
- Can you make lunch at home and bring it to work?
- Are you paying for a gym membership you haven’t used in 3 months? Maybe start doing workouts at home or jog with friends.
- Now that people are emerging from the pandemic, do you need all those streaming services?
- Can you invite friends over for dinner and a movie night instead of going out to eat?
- Are you paying for things you can do yourself, such as washing your car?
The toughest decisions are often the smartest choices.
As you form your budget, you should also save enough to build an emergency fund. You never know when there will be a larger-than-budgeted car repair, a healthcare crisis, or another unexpected expense.
I recommend setting aside at least six months of spending in a cash account that’s separate from your daily transactions. Set up a nominal amount to transfer into this account each time you get paid. Maybe the initial goal is having enough to replace just one paycheck. As this account increases, portions can be redirected into capital purchases, such as furniture, cars, or homes.
You also need to consider what happens when you die.
Every time you open an account or purchase property, you’re making an estate decision. If you listed your former spouse as the beneficiary, then if you die, your ex-spouse can be the one who receives the money from your accounts, your property, your life insurance, your home, and your car.
No matter what you say in your will, if you have a beneficiary, that may supersede everything, so double check who you have listed as beneficiaries.
You also need to update other forms. Anything where you have sole ownership will go through probate, which is a court-supervised process of settling a descendant’s estate. To avoid that, add a beneficiary to assets in states where it’s permitted. If you can’t add a beneficiary, you can set up a trust – a legal document used to establish ownership.
It’s also crucial that you have an updated will to make sure your assets go where you want. Without a will, assets will be divided based on your state’s laws. That means some of your loved ones or a favorite charity may not receive some of your assets.
Besides your money and your property, you should also think about your health. When you near the end of your life, do you want your former spouse to make crucial medical decisions on your behalf?
Some things to consider:
- Have you drafted a power of attorney? This is a legal document that allows another person to make decisions for you. Those decisions range from whether you should get a feeding tube if you’re incapacitated to whether to liquidate assets on your behalf to cover out-of-pocket medical expenses.
- Have you prepared a living will that outlines your preferences for medical care if you can’t make decisions for yourself? What if you’re incapacitated, because you’re fighting dementia? Or in a coma? Or terminally ill? The living will guide doctors and caregivers so your family and friends don’t have to navigate difficult choices and guess what you would have wanted at possibly the worst time of their lives.
If you’ve already drafted these documents, make sure they’ve been updated if you no longer want your ex-spouse to make such critical decisions.
After your divorce, it’s wise to review your employer’s benefits, especially if you had been relying on benefits provided by your former spouse’s employer. For example, familiarize yourself with healthcare options, prescription drug coverage, dental and life insurance, disability, wellness programs, legal assistance, and corporate discounts that range from your cell phone to auto and home insurance.
Many companies also offer plans in addition to 401(k)s, such as Retirement Healthcare Savings Plans,
where the employer will match a certain annual contribution. It’s also important to understand Social Security spousal benefits for divorced clients. To collect those, you must meet certain criteria:
- Been married at least 10 years
- At least age 62
- Currently single, or have been divorced for at least 2 years if your ex-spouse is not currently collecting their own benefits.
Life may have just become a lot more difficult, to say the least. Don’t be afraid to ask for help from a financial planner, which your retirement plan provider may offer. The advisors can help tailor a plan that meets both your short- and long-term financial goals so you can focus on all the other changes you must make.
About the Author, Shelly-Ann Eweka
Shelly-Ann Eweka is a nationally known financial planner and well-known speaker who has pushed to narrow the widening gap in retirement savings between genders and different races. After nearly three decades in financial services, Shelly served as an expert on the Woman-to-Woman Community section of TIAA.org. Within the firm, she launched a group called Black Indigenous Women of Color Financial Advisors/Planners of TIAA, and she’s a member of several other organizations – including ones for Black and female employees – that create leaders and influence culture.
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