A divorce not only impacts your current financial situation, but can have a significant impact upon your retirement plans too. Typically speaking, your living expenses after a divorce increase, your net income decreases, and your net worth is cut in half. All of these events can limit your ability to save for your retirement.
If your worried about how your will retire comfortably after divorce, follow these seven steps. They will help put things in perspective and get you back on track to a happy retirement.
1. Factor In Existing Retirement Savings All retirement savings accumulated during the marriage are considered a marital asset, and split accordingly. This includes both government and private retirement savings and pensions. Splitting your CPP and Registered Pension Plans that were accumulated during the marriage can have a significant kick-start – or set-back to your retirement planning. It’s important to revisit your retirement goals after a divorce as even the best plans get altered.
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2. Put A Budget In Place As your day-to-day living expenses have increased, it’s important to stay on top of these costs and put a detailed monthly budget in place. Don’t leave any incidental expenses out of the budget. That daily $5 latte translates into $150/month. That latte invested at 5% Rate of Return over 20 years equals over $60,000!
3. Manage Debt Wisely Carrying debt today is almost second nature to many. If you must carry debt, ensure that you pay off the highest interest rate yielding debt, like credit card debt, first. Don’t be lured by the credit card companies’ appealing offers. If you must borrow, look at a low interest line of credit as a means of consolidating payments.
4. Make Sure You’re Covered If You Get Sick Managing risk is another important element to consider. We often look at getting sick or disabled as something that happens to somebody else. Think about if you got sick with cancer and were unable to work for a number of months. How do you pay your bills let alone set aside money for retirement savings? Look at getting critical illness and disability insurance in the event that you get sick and are unable to work. A lump sum payout can take care of your expenses (including retirement savings) while allowing you to focus on getting healthy.
5. Pay Yourself First Set aside a modest sum at the beginning of every month (or payroll deduction if available) towards your RRSP. Remember the latte? Small contributions can result in significant growth over time.
6. The Earlier Your Start, The Better Many of you have heard of the power of compounding. This example demonstrates how you can accumulate significant wealth over time:
Sally started contributing $1,000/month at the age of 30 into a retirement savings plan with a plan to retire at 65. Assuming a 5% ROR compounded monthly, she would have accumulated $1,141,000.
Then take Bob, who didn’t feel the need to start thinking about retirement until the age of 50. He’d like to retire at 65 as well. Assuming the same 5% ROR as Sally, Bob would have to contribute $4,250/month to his retirement savings to end up with the same $1,141,000 as Sally at 65.
More specifically, Sally’s principle contribution at 65 was $420,000 whereas Bob had contributed $765,000.
It’s important to realize that it’s never too late to contribute to save, but it’s always better to start earlier.
7. Work With A Financial Planner Financial Planners assist with debt consolidation, risk management, budgeting, wealth creation, retirement and estate planning. It’s important that you trust the individual that you’re working with. He or she will set you up with budgeting templates, financial needs analysis, financial goal setting, and a retirement plan. They should get a sense of your risk tolerances and mirror a retirement strategy that you’re comfortable with.
Divorce doesn’t represent the end of your financial world. You may find a passion, excitement and vigour for the new financial journey that you’re on. By being fiscally present, starting as quickly as possible, and working with financial experts who you trust, you will be able to get back on the right retirement track.