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Salvaging a Retirement Strategy Post Divorce
With so many “wants”, it can be difficult to spend only on “needs” and to be diligent about putting money aside as part of a retirement investment plan. Now consider how divorce may affect that investment plan? Suddenly you may have only half of what you’ve saved.
It can be a challenge to get back on financial track and into an active retirement planning strategy after a divorce. As a Financial Advisor with over 20 years of experience advising investors, I have seen situations that can potentially derail a retirement strategy recovery post-divorce. One way we can get derailed is when our thinking about investments is very narrow. For example, some folks have tendencies or proclivities to think about money and investments in “all or nothing ways” (mental biases) These biases can have much to do with individual dispositions toward risk.
In meetings with divorcing or divorced clients I’ve had some clients state they “cannot afford to lose” any of the retirement monies they’ve received in a settlement. Sometimes this attitude can manifest into an unwillingness to consider certain investment styles- even those styles may make best sense for them over the long term. In other meetings I might hear the opposite perspective as well. For example the statement might be “I have to be very aggressive because I need to earn back what I just lost in the divorce settlement”. Again we try to focus on understanding where that specific investor is coming from both in terms of his/her risk sensitivity and in terms of how they are managing the complex emotions of the divorce process. As with all investors, how someone feels about risk has the potential to morph over time. This is normal.
When we consider what might be the best foundation for a post-divorce retirement strategy, asset allocation counts for men and women alike. In other words, all the “eggs” should not be in the same basket. A 2000 study by Ibbotson and Paul D. Kaplan concluded that asset allocation is responsible for the majority of the absolute level of investment return. It is important for you to have a conversation about asset classes, return and risk characteristics, and other investment fundamentals with your Advisor. In an article written by Forbes contributor Todd Millay he states, “Diversification helps limit company-specific risks like management fraud, regulatory changes, natural disasters and unanticipated technological change.”
Additional financial education can be especially helpful for investors who are new to managing their investments. We find that as they become more informed, they are able to make better financial decisions that may potentially lead to enhanced long-term outcomes.
It is easy for any investor to make a financial decision that “feels” best but that perhaps would not have permitted them to achieve the best possible long term outcomes for their unique situation. Sometimes the “feels best” mistakes live at opposite ends of the risk spectrum; too conservative or too aggressive for specific goals and circumstances. The chance of making these (and other) types of mistakes can be minimized by understanding mental and situational biases. We cannot change the way our brains process information, but being aware of mental biases can be a step toward self-knowledge.
The loss of the retirement nest egg as a result of splitting marital assets especially later in life-may necissitate a reduction in the expectations about lifestyle spending during retirement.
The best way to determine the proper investment mix for what’s left of your retirement nest egg is achieved by considering a wide array of factors including but not limited to: your investable assets, your investment time frame, your family obligations, your income and work expectations, your health, your risk tolerance, your spending goals for retirement, and your other sources of retirement income.
For your “to do list" during or after divorce: Seek out an experienced financial professional who can help you navigate the financial complexities of divorce. Your advisor can help you clarify your goals and make sure that you are in a position to pursue them.
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No-fault grounds for divorce in North Carolina are living separate and apart for one year or living separate and apart for three consecutive years, without cohabitation, by reason of the incurable insanity of one of them.
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