Tips on Saving for Retirement After a Divorce

Posted by Divorce Network, February 2010

 

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If you’re divorced, or are going through a divorce, you may be wondering how to plan for your financial future now that you’re single.  In this situation, being as proactive as possible is the smartest thing you can do.  Here are some tips on financial planning after divorce.

The most important thing to do after a divorce is to set up an emergency savings fund. You should do this before saving for retirement, if you don’t already have one.  A high-interest savings account from an online bank is a good choice, as it is slightly less easily accessible and therefore requires a little work to get the money out.  Online banks tend to give investors a slightly better interest rate than conventional banks, as well.

Once you’ve established an emergency savings fund, if you have the option to contribute to a 401K plan at work, make sure you’re taking full advantage.  This is a cornerstone of financial planning after divorce, as contributions you make to the plan are tax advantaged, and many employers match a certain amount of what you put in.  This is basically free money.  Contribute at least up to your employer’s match, even if it’s only 3%.

Whether or not you should completely max out your 401K plan (the contribution limit for 2009 is $16,500) is controversial; some experts say you are better off contributing only as much as the employer match, while putting the rest in an IRA, which gives you many more investment options.  There are several types of IRAs, including Roth IRAs, which grow tax-free, unlike stocks or bonds (income limits apply).  If you don’t qualify for a Roth IRA, a traditional IRA is the next best thing.  Up to certain income limits, your contributions are tax-deductible, making this another outstanding option for financial planning after divorce.

Whether you are dealing with a 401K or IRA, make sure your money is going into a balance of stocks and bonds, the ratio of which should change as you progress towards retirement.  A very basic rule of thumb to calculate ratio is to subtract your age from 100.  That is the percentage you should have in stocks; the remainder, in bonds.  This is generally considered a conservative estimate for younger persons, so consult a financial planner for details, and remember to check and update your portfolio balance annually.

Although it may seem overwhelming, financial planning after divorce doesn’t have to be scary.  By following a few simple principles, and taking advantage of the excellent investment options available, you will be on your way to a comfortable retirement in no time. 

 

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