Jamie, 59, is inching closer to retirement, but after going through a nasty divorce, his emergency fund and savings have been wiped out. He still has a 401(k), a pension and some investments, but his divorce will impact the value of those assets.
Without additional savings to supplement those assets — which will be divided up with his ex — he’s worried he’ll have to delay retirement or do some serious downsizing.
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This is a challenge facing many Americans. The current divorce rate nationwide is 42% for first marriages, according to the Centers for Disease Prevention and Control (CDC). But gray divorce, where couples over the age of 50 decide to part ways, is becoming increasingly common.
Back in 1990, only 8.7% of divorces in the U.S. were gray divorces. By 2019, that number had ballooned to 36%, according to a study published in the Journals of Gerontology: Social Sciences. And that has some serious impacts on their financial stability as they head into their golden years.
If you’re in a situation like Jamie, here are three crucial things to do right now to help cobble together a comfortable nest egg.
You can’t plan a roadmap if you don’t know where you’re going. Since Jamie had a retirement plan with his ex-wife, he now has to create a new one for himself.
That means he’ll need to calculate a new ‘retirement number’ — the target amount you need to live the life you want in retirement. A rule of thumb is to save 10 to 12 times your final salary.
That number should take into account the age at which he wants to retire, his annual salary, his expenses and savings, as well as investment portfolio performance. It should also take into account the standard of living he wants to maintain in retirement.
Depending on his final retirement number, he may have to make a few adjustments, such as working a few years longer than he planned or perhaps downsizing his standard of living. He may even change his retirement plans altogether, like working part-time at a side hustle or moving out of the country.
While the divorce wiped him out, Jamie still has some retirement income. Since he qualifies for Social Security, he can use this to supplement any savings he manages to cobble together before he retires.
At 59, the earliest he could claim his Social Security retirement benefit is three years from now, at age 62. But at that point he’d get a permanent reduction of his benefit by 30%.
If he waits to claim his benefit until his full retirement age (FRA) at age 67, he’d receive 100% of his benefit. If he’s able to delay his benefit past his FRA, he’d get a permanent bump of 8% for each year he delays up until age 70.
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While his savings may be depleted, Jamie still has a pension, 401(k) and individual retirement account (IRA). It’s important to review your existing retirement accounts and understand how divorce will impact the division of those assets.
This can be made more complicated because the rules on dividing pensions and assets vary from state to state, so it’s a good idea to consult a divorce lawyer and financial advisor.
During a divorce, traditional pension plans and employer-sponsored retirement plans such as 401(k)s can be divided through a court order called a Qualified Domestic Relations Order (QDRO), used specifically for this purpose.
Funds that you’ve contributed during the course of your marriage to a traditional pension or 401(k) are typically considered marital property. Unless you have a prenuptial agreement, each spouse would be entitled to a portion of those funds.
When it comes to IRAs, whether traditional or Roth, dividing those assets would follow your state’s community property rules. Basically, if the IRA was opened while you were married, it would be considered marital property.
If the IRA was opened prior to the marriage, then the contributions made during the course of the marriage would be considered marital property.
Under normal circumstances, IRAs can’t be transferred or gifted to a new owner, but divorce is an exception. IRAs can be divvied up between spouses tax-free via a direct transfer to a new IRA, but if this isn’t done properly, you could end up paying taxes and penalties.
Once you have a new retirement number in mind and understand how much you’ll have left over after divvying up your retirement assets, you can come up with a new retirement savings strategy. This should also factor in at what age you plan to claim your Social Security retirement benefit.
For someone in their late 50s, it’s harder to catch up — you won’t benefit from the power of compounding — but it’s not impossible to cobble together some savings.
Jamie may need to cut back and live on less so he can direct as much as he can into savings. He may want to start by building up an emergency fund (to cover about three to six months of expenses) and paying down any high-interest debt. From there, he can start rebuilding his retirement savings.
That includes maxing out his 401(k), especially if his employer matches his contributions. Plus, since he’s 50+, he qualifies to make catch-up contributions.
The maximum contribution limit for a 401(k) in 2025 is $23,500, with an allowable $7,500 catch-up contribution for those 50+ (so Jamie could contribute a total of $31,000). Those between the ages of 60 to 63 can make a catch-up contribution of $11,250.
Those aged 50+ can also make a $1,000 catch-up contribution to their IRA, on top of the $7,000 annual contribution limit, for a total of $8,000. It’s worth having a chat with a financial advisor or tax specialist to understand whether a traditional or Roth IRA makes sense for your situation — both offer different types of tax advantages, depending on your income level.
Jamie may also want to work with his financial advisor to explore his investment options and optimize his portfolio to meet his new goals. While his marriage may be over, it doesn’t mean his retirement dreams have to be.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
