Making the right financial decisions in the throes of a divorce can be difficult. This week we look at a woman ready to figure out her financial future.
The situation
Lynn, 58, divorced her husband 12 years ago and is still dealing with the financial implications. The couple has three children, and while they were married, she left the workplace to raise the children.
After her divorce, Lynn went back to work for the Forest Service, earning an annual salary of roughly $43,000. She used her alimony to maintain the home and children and has been unable to save for the past 12 years. Lynn commuted an hour each way to work to keep the children in the same schools and home.
The children are now grown. She decided it was time to cut expenses, sell the home and move into a smaller property closer to work. Lynn netted $272,900 from the sale and used the money to pay cash for a townhome costing $249,900. With a paid-off home, she raised her deferred compensation to $500 per pay period, totaling $13,000 for the year. Her balance in the plan is $60,670.
She also has $23,000 in savings, a Roth IRA with $6,062, a mutual fund worth $11,140 and $5,487 in credit-card debt.
Lynn knew she was entitled to a pension benefit from her ex-husband’s company, but was flummoxed by the information provided to her at the time of the divorce. But before her meeting with What’s The Plan, she had never called them back to see what she is owed.
Lynn wrote in because she feels she must “double down and buckle down” if she is ever going to retire. “My biggest mistake was liquidating my retirement to put down on our home when we first got married.”
Recommendations
Lynn is not alone in the decisions she’s made. Trying to maintain an expensive family home, spending too much money on the children to “make it up to them” and neglecting financial security are common mistakes made during a divorce.
Everyone makes financial mistakes but despite a few missteps, Lynn is in better shape than she thinks. After a call to the pension office, we were able to get a clear picture of her benefit. Lynn received the happy news that her portion of her ex-husband’s pension will pay her $993 per month (with no cost-of- living increase available) or she can take a lump sum of $230,962 and roll it into an IRA.
I recommend that Lynn take the lump sum and roll it over into an IRA now. We estimated that this monthly pension would equate to only a 3.78 percent rate of return between now and when Lynn turns 90. Rolling this into a moderate portfolio fits Lynn’s goals. It allows her flexibility in when she withdraws the money. If she does not use it in early retirement, she can spend it enjoying her family.
If Lynn continues to save $500 per pay period, for four more years, our calculations show that from her assets, Social Security and pension, she will have an income of $3,722 per month after tax. And it will increase with inflation from her age 62 to 90. If Lynn stays on this path until age 66, she could spend $4,741 per month after tax.
Lynn should keep her savings rate up to make up for lost time, but she is definitely on track.
Email Pam at whatstheplan@consistent-values.com to get advice. Names and identifying information are changed to protect identities. Pam Dumonceau has 21 years of experience in the financial planning industry. What’s the Plan is not a substitute for financial planning or dedicated professional advice.
What’s your plan?
Ask Pam what you should do — e-mail whatstheplan@consistentvalues.com to get advice. Names and identifying information are changed to protect confidentiality, and there’s no charge to be featured in the column.
