A divorce not only impacts your current financial situation but can have a significant impact upon your retirement plans. Typically speaking, your living expenses after a divorce increase, your net income will decrease and your net worth is cut in half. All of these events limit your ability to save for events in the future like retirement.
The following will help you put things in perspective and get you back on your new retirement track:
- 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.
Money accumulated in the Canada Pension Plan gets split in half by something called “credit splitting”. Don’t minimize the impact of the CPP has upon your retirement. If you start collecting it at 65, today it can represent as much as $1,150/month. This amount gets indexed with inflation every year for the rest of your life.
A private pension plan, depending upon its format gets split as well, and half the amount gets transferred into a locked-in personal RRSP. These savings cannot be accessed until you start taking your pension.
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 line of credit as a means of consolidating payments.
4. What Happens if Something Happens to You? 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 deduct if available). Remember the latte? Small contributions can result in significant growth over time.
6. Start Early: Many of you have heard of the power of compounding. This example demonstrates how over time you can accumulate significant wealth:
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 years old 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!
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.
Chris Coulter is the Founder and President of The Finish Line Group. He works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies, enable employee retention strategies and allow them to exit their businesses on their terms.
Chris’ passion for what he does evolved from the mistakes he made in his first business; by not diversifying his risk and not utilizing a lot of the opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on how to avoid many of his former oversights and ultimately control where their finish line ends.
divorce and retirement