A lot changes in the wake of a divorce. But the biggest impact typically doesn't come until years later.
"The most financially disastrous part of divorce is that you're taking a unit that has two incomes with one residence and one retirement goal, and you're splitting it," Ameriprise private wealth adviser and financial planner Ylisa Sanford tells Business Insider.
Where two incomes once supported one set of household goals, that same amount now has to support two separate households, and two separate retirements.
Divorce can devastate retirement accounts
It's not uncommon for retirement accounts to be lost in divorce. In some states, a 401(k) is considered community property, and can be divided 50-50. Just like other investments, your retirement account could be split 50-50, and if you and your spouse weren't both contributing equally, your savings could be in jeopardy.
As Reuters' Beth Pinsker reports, the typical divorced household has a 30% lower net worth than a non-divorced household. The Center for Retirement Research at Boston College estimates that divorce has a similar impact on retirement accounts to the Great Recession had in 2008: Divorced households are seven percentage points more likely not to have enough money to make it through retirement, while the Great Recession made this same scenario nine percentage points more likely.
It's much harder to make up for lost time
Saving early is the best way to take advantage of compound interest to boost retirement savings and grow long-term wealth. But after a divorce, you might have to start all over.
In Sanford's experience, helping your retirement funds recover from divorce starts by figuring out where they currently stand, and what needs work. "Part of what people are required to do in the process of divorce is go through their different expenses. Think, 'What do I need for housing, groceries, dining, entertainment, travel, healthcare, medical costs? Those kinds of things,'" she says.
Then, it's important to consider anything you've gained or lost in the divorce. "How will any compensation be treated if there is anything such as alimony or property equalization, and what are the tax implications of that?" Sanford says.
Then, you can start thinking about new retirement goals, and finding out how much you'll need to make them possible.
Working with a financial planner can help
To get a new retirement plan on track, Sanford says that meeting with a financial planner can be a big help.
In her practice, planning for retirement after a divorce means looking at all sides, from Social Security income to alimony. "We collaborate on a plan so you can see the impact of different retirement ages, the impact of different matching from workplace benefits, and different ages to receive Social Security income. Also, we look at whether you'll receive spousal benefits, pensions, or additional retirement dollars from a former spouse," Sanford says.
She continues: "Then, we find out what amount they need to save, what savings rate we should count on, and what their risk tolerance is." From there, it's all about starting to save again.
Divorce can make a big dent in retirement plans. While your plans will look different post-divorce, it's possible to get yourself on a new path.
Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.
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