How to Avoid Retirement Problems in a Gray Divorce
By: M. Scott Gordon
Getting divorced should never mean you are unable to retire due to financial difficulties you would have avoided if you’d remained in an unhappy marriage. However, many people who decide to file for divorce later in life worry a divorce will devastate their retirement savings and may force them to return to work. In other words, there are concerns a gray divorce effectively can prevent a person from retiring. According to a recent article in Barron’s, gray divorce — or divorce among older adults — does not have to mean you will have financial difficulties that will impede your retirement. While divorce can significantly affect a person’s finances, getting divorced later in life does not have to result in financial devastation.
The following are some tips for staying on top of finances during and after a gray divorce.
1. Create a Detailed Budget That Includes Your Cash Flow
As the article emphasizes, one of the first steps any person — regardless of age — should take when planning for a divorce is to analyze your cash flow to understand how much income you have coming in and how much you are spending. Once you get these numbers, you should compare them to the cash flow you grew accustomed to during your marriage. You will likely see you have less money coming in each month and that you will need to set aside more money for bills each month, since you will no longer be sharing those expenses with a spouse.
However, you may learn you can afford close to the same standard of living you experienced during the marriage, as long as you decrease your expenses, increase your income, or both. For recent retirees, reducing expenses may be the best way to remain in retirement and to live comfortably. If you plan to work for several more years before retiring, finding a way to earn more money or work additional hours can help you to be prepared for living in retirement.
2. Consider How Divorce Will Impact Your Taxes
It is also important to consider how your finances will be impacted by taxes after your divorce. You may lose certain deductions or other benefits after you file as single. However, if you are receiving alimony, you could end up with more money than you might expect. Under the Tax Cuts and Jobs Act, any divorce finalized on or after Jan. 1, 2019, results in alimony being taxable for the spouse paying it, while the spouse receiving it no longer has to count alimony as income for his or her taxes.
3. Know the Amount of Your Retirement Savings and Plan Ahead
If you have already gone through your divorce, you know how your retirement account may have been distributed between yourself and your spouse. As long as you have not yet retired, there is still time to plan ahead for retirement and to increase the amount of your retirement savings. Those 50-years and older can contribute up to an additional $6,000 in a 401(k) or other employer plan and up to $6,000 in an individual retirement account (IRA).
When it comes to dividing retirement assets, you should speak with an experienced attorney if you are still in the early stages of your divorce.
Contact a Chicago Divorce Lawyer