How to Catch Up On Retirement Savings After Divorce

How to Catch Up On Retirement Savings After Divorce article image.

Divorce can be a trying time emotionally as well as financially. Short-term expenses such as legal fees can easily add up, and the stress of selling assets, figuring out where to live and no longer having someone to split bills with can take a toll. You may even have new long-term costs to fit into your budget if you're responsible for paying child support or alimony. These factors can all have an impact on retirement savings, especially if you've taken early withdrawals to cover costs or cut off your contributions entirely.

Your retirement accounts can recover, however, as long as you take the time to reassess where you currently stand and where you need to be in order to retire according to your plans.

The Impact of Divorce on Retirement

A 2018 analysis by the Center for Retirement Research at Boston College found that divorce can devastate retirement savings. The researchers explain that both wealth and earnings are typically lower for previously divorced individuals compared with those who haven't experienced divorce. Divorced households are 7 percentage points more at risk to not have enough money for retirement.

This is not surprising considering that the legal process of a divorce itself is expensive. In a survey by legal site NOLO, respondents who used attorneys through the entire divorce process paid $12,900 on average, and the median cost for all survey respondents was $7,500.

Additionally, the process of divorce causes some to give up savings, including retirement accounts. For those who live in a community property state, most assets acquired during the marriage are presumed to be joint property to be divided equally upon divorce unless there's a prenuptial agreement stating otherwise. There are exceptions for assets considered separate property, such as those acquired before the marriage or inheritance.

If you live in a community property state and don't have any legal documents stating otherwise, you may have to give your ex-spouse half of your retirement savings. Some who've gone through divorce then owe a portion of their income to child support, spousal support or alimony payments, which can make it harder to scrape together savings. This financial fallout can leave you behind on your retirement goals.

How to Catch Up On Retirement Savings After Divorce

While divorce can set you back financially, there are some strategies that can help you accelerate your retirement savings after divorce.

  • Increase your retirement contribution. If you regularly contribute to an IRA or 401(k) that's now partly depleted, try setting aside a larger percentage of your income to help make up for what you lost. However, some divorcees may actually have less to contribute due to the higher cost of living without a partner. If you're unable to increase your contribution now, plan for how you'll do it once your financial situation improves.
  • Tighten your budget. If you no longer have someone to split bills with, and especially if you're paying steep legal costs from the divorce, it may unfortunately be necessary to reassess your budget and cut expenses. Review recent bank and credit card statements and identify spending that could be cut, even if temporarily. With expenses reduced, it may be easier to avoid taking on debt or set aside some additional retirement savings.
  • Earn additional income. Sometimes budget cuts aren't enough and it's necessary to find ways to make extra money. This could look like trying to obtain a raise at your current job, taking on a part-time job, or doing a flexible side hustle like walking dogs, babysitting or delivering groceries in your spare time.
  • Take advantage of catch-up contributions. Because retirement accounts like IRAs and 401(k)s are tax-advantaged, the government limits how much you can contribute to them each year. For those aged 50 and above, however, the IRS permits a larger annual contribution to "catch up" and set more aside in these retirement accounts. If you're 50 or older and able to set aside more money, take advantage of the catch-up options to replenish your retirement accounts.

Putting Off Retirement

Some divorces may leave individuals with such depleted savings that even budget cuts, extra income and increased contributions aren't enough to keep retirement on track. If you've done the math and your current savings rate won't allow you to live comfortably in retirement, it could mean having to push back your retirement date.

This is a huge decision, so it's wise to hire a financial planner or advisor to guide you. They can review your new financial situation and help you get a grasp on what you need in order to retire, and if there are any alternatives or if retirement does need to be put off to make up for a shortfall.

Don't Forget Your Credit

While a divorce won't show up on your credit report or directly affect your credit score, its repercussions can take a toll on your credit. For example, if you end up taking on a larger share of debt, if you miss payments on any bills during a confusing transition period, or if your ex-spouse makes late payments on accounts that still have your name on them, your credit can be negatively affected.

To ensure divorce doesn't hurt your credit, consider monitoring your credit carefully until long after the process is completed. You'll be able to see which accounts are still tied to your name, so you can ensure the bills are paid on time, and it can help you figure out if anything hasn't been updated properly. You may also find some room for improvement by watching how your score changes. Divorce can be financially devastating, but by being proactive, you can help get your life and retirement savings back on track.