How to Rebuild Your Retirement and Savings Post-Divorce

Disclaimer: We are not financial advisors. The content in this blog is intended for educational purposes only. We can connect you with a licensed financial advisor if necessary. Always remember to make smart decisions and do your own research.

During a marriage, people make a variety of financial decisions counting on the fact that the union will last many years, potentially beyond retirement.

For example, it may make more sense financially to use one spouse’s income for monthly expenses and the other’s to invest in a 401(k) in the other spouse’s name. In the event of divorce, the spouse who wasn’t able to focus on contributing to a retirement fund in their own name will likely be in a more vulnerable position.

In America, it is much more difficult for people who have gone through divorce to accumulate enough savings to retire at 65. According to a study by the Center for Retirement Research at Boston College, non-white women are disproportionately affected due to the wider pay gap. Ultimately, regardless of gender or ethnicity, divorce can duplicate housing costs and other expenses, dramatically reducing each spouse’s capacity for saving.

The Boston College researchers also found that divorced households have approximately 30% less net worth when compared to non-divorced households. And the risk of not having enough money to last through retirement is 7% higher in the case of divorced individuals.

Whether one of the spouses was financially dependent on the other or not, divorce will change everything about how you organize your finances.

Especially if you are getting a divorce later in life, you will have to adjust your financial priorities and plan for the future. Decisions made during the asset division stage will have tax consequences and impact your retirement funds.

How to Minimize The Financial Risks of Divorce

Divorce is not only the end of something; it can also be a promising beginning. Many people fall in love again, discover new passions, find a new career, and find new ways to enjoy life to the fullest as they enter a new chapter in their lives.

To explore all the new opportunities life as a newly single person has to offer, it is important to feel safe financially. Here are some basic steps to minimize the financial risks of divorce.

  1. Analyze Your Current Financial Situation

    Try to get a clear picture of your net worth, your debt, properties, lines of credit available to you, mortgage obligations, etc.

    You should analyze all relevant data in the following categories:

    • Credit score
    • Assets
    • Debt
    • Income and expenses
    • Tax impact of divorce
  2. Close Joint Accounts and Open New Ones in Your Name

    During divorce, shared accounts can spell trouble in more ways than one. Following a separation and prior to finalizing the divorce, your spouse could apply for bank loans or make large purchases and other financial movements that could significantly reduce the marital assets. Some people may want to keep a joint account to pay for the children’s expenses, but it is much safer to promptly separate your finances from your spouse’s.

    Close any joint accounts and cancel credit cards that result in one spouse paying for the other’s purchases.

  3. Take Control of Your Finances

    Sometimes, one of the spouses is more dedicated to certain aspects of the marriage that don’t include finances. If this is your case, you need to make a budget, understand how much money you need to maintain your standard of living, and learn whether you need to make any adjustments to stay in the clear following divorce.

    Your spouse may have been in charge of investment decisions during the marriage. Now, you need to take control. Learn about any investment accounts you own and whether more convenient options are available on the market.

    Consider keeping an emergency fund (at least three months’ worth of expenses) and allocating 20% of your net income to savings or debt payoff.

The Ups and Downs of Dividing Retirement Assets

It is not easy to rebuild your retirement nest egg after divorce, but it is not impossible. You might lose a substantial amount from your 401(k) in your divorce agreement. Or you might have to cash in your retirement IRA to fund your divorce settlement.

When the time comes to split pensions, 401(k)s, and IRAs, the obvious 50-50 split will not always make sense financially. Seasoned New York divorce attorneys will have access to financial advisors and other specialists who can help you design the most equitable and convenient retirement assets division plan.

Working with an experienced high-net-worth divorce attorney and a financial planner can provide creative solutions for replenishing your retirement accounts.

For example, if you lost hundreds of thousands of dollars from your 401(k) as a consequence of divorce, since annual contributions are capped, you may not be able to rebuild it as fast as you need. In these cases, you can max out your 401(k) contributions while simultaneously putting a similar amount into a taxable investment account. This way, you can feed your 401(k) while also building an emergency fund, thus minimizing the negative impact of divorce.

Another aspect to consider is the cost of health insurance after being knocked off your spouse’s plan. In these cases, it can be sensible to ask for a larger portion of a marital savings account (enough to cover the cost of a new healthcare plan) and less of your former spouse’s 401(k).

Perhaps you want to relinquish a portion of an IRA in order to be able to keep the marital home. Sometimes, a reverse mortgage can make sense. The menu of financial tools to help recent divorcees make a sensible budget, start an emergency fund, and replenish their retirement money is quite varied, and it will take some sound advice and careful planning to achieve these goals.

If you were a stay-at-home parent and received a substantial portion of your former spouse’s IRA as part of the divorce settlement, there are many tax strategies you can use to minimize the impact of divorce once alimony payments run out. For example, converting a pre-tax IRA into a Roth IRA will result in tax-free contributions in addition to other benefits.

If you are the less affluent spouse, there is always an upside: a lower tax bracket. Whatever your situation may be, your legal and financial advisors can help you maximize your retirement assets and minimize risks.

Post-Divorce Retirement and Savings Specialists in New York

Our team of New York divorce specialists can help you make sound decisions based on multiple legal and financial factors so you can enjoy a stress-free retirement when the time comes.


Karen Rosenthal

Karen B. Rosenthal is a partner and co-founder at matrimonial litigation firm Bikel Rosenthal & Schanfield LLP, where she brings 35 years of matrimonial law experience to bear in matters involving high-net-worth equitable distribution, contentious custody battles, and other high-stakes disputes. Certified as an Attorney for the Child and a frequent speaker on topics related to children going through high-conflict divorce, she has been recognized as a leading New York lawyer by Super Lawyers, Best Lawyers, Crain's New York Business magazine, and New York magazine.

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