Week 137 - Be Careful! Retirement Options Can Change Drastically After Divorce

Situation: There was a great discussion related to divorce after the age of 50 on NPR (here’s the link if you’d like to read it). There is even a new term coined! It’s called “Gray Divorce.” The reason we remember this NPR show is due to one particular statistic. In 2009, one in four persons who divorced was over the age of 50. Why is this information showing up in a blog about investing? Because if you are among the Gray Divorced, and you live in a state where marital assets are divided 50:50 in property settlement agreements, then your retirement savings just took a direct hit with a 50% loss. If you’ve been following this blog for very long, you also know that recovering from such a loss when you are beyond the age of 50 is going to be impossible for most people. Today’s blog is going to be a case study on managing divorce after age 50 and calls for focused attention on personal finances, so that you’ll have at least some resources available after the age of 70.

In our case example, we will discuss the circumstances of a wife who was a homemaker and caregiver for almost 30 years. She quite probably has at least some college, maybe even a degree, but in all likelihood her job skills are out-of-date. When her divorce property settlement was determined, she found out that there were some retirement monies saved but there were also bills and lawyers fees that had to be paid. If her husband was making $80,000/yr, she could receive $40,000/yr of alimony for let’s say 5 yrs but that money may not go very far after monthly bills are paid. Let’s see, if you estimate 20% in taxes, then $40,000/yr becomes about $2,700/mo to live on and pay bills. Frequently, a family home will be sold to pay debts and divide the equity but in the past few years many mortgages have been underwater, creating even more financial nightmares.  Quite probably our Gray Divorcee is now living in an apartment and will have to find a  job. 

Most of us understand already that 50 is a watershed year for retirement plans. By reading information on the internet related to retirement planning, one quickly realizes that to remain on target, by age 50 one should already have four times her salary stashed away in retirement plans. And, even though the kids are on their own, many will face financial needs, including help with a down payment for a home or paying college bills.

The task is daunting at best and overwhelming at worst. How to get started? Let’s begin by writing down a plan. First of all, look at yourself as a complete and whole person. Examine your personal relationships, identify those that are fulfilling and energizing, and find ways to be more involved with your neighbors and community. Secondly, build and strengthen your spiritual practices. Thirdly, get fit, eat healthy, sleep soundly, and keep your medical appointments.

The next area to examine will be finding a job, brushing up on your job skills, perhaps even taking a college course two evenings a week. While jobs in retail can be relatively easy to turn up, and can be a way to start back to work, there are a number of reasons why those jobs are not your best long term option. Those reasons include poor or no benefits, as well as unfavorable scheduled hours. Better jobs are to be found in healthcare, education, or industry. Use your acquired people skills, maturity, and work ethic as selling points. You can turn your community, school, and church organizational activities into a job reference by having an upstanding member of the community write you a letter of reference. And keep knocking on doors! Don’t take “no” for an answer!

Now we are at the heart of this blog’s discussion: what about my financial situation? How do I pay bills and pull off retirement savings at the same time? We strongly recommend keeping two separate savings plans, each with a different function. Firstly, set up a “slush fund” that is to be used for emergencies. Secondly, develop a separate fund that is for retirement. The slush fund will probably see several withdrawals occur over the next few years so having it based in a savings account at your bank makes sense. “How much money do I set aside for the slush fund?” We recommend that you start by creating a budget. Make a list of everything you spend money on for one month then categorize and add up the amounts. Monies left-over at the end of the month, or monies spent on non-essentials, are candidate dollars for savings. Later, when the account builds some value, there are better options to consider than a savings account, and those involve learning some rudimentary investing skills (see Week 15, Week 33).

Now on the subject of the retirement plan, we suggest putting in place two particular practices. The first is that of secrecy. Shhh! Don’t talk about it, and just forget that the money even exists. The nest egg you are creating is for the future, when you are fully retired. By forgetting that it exists now, you avoid the temptation to spend it. Emergencies are why the slush fund was created. And this ties in to the second practice we recommend adopting, that of discipline. It will require discipline to set aside retirement money and not spend it. It will also require discipline to add a monthly amount to the slush fund for use in emergencies.

There are a variety of forms that your retirement plan can take (see Table). The simplest discipline is to put $50/mo in your fund as an automatic deposit from your checking account. We recommend that you use one of the lowest-cost and lowest-risk “balanced” mutual funds: Vanguard Balanced Index Fund (VBINX) or Vanguard Wellesley Income Fund (VWINX). Those are safe and well-managed funds but a potential drawback is that Vanguard requires you to open your account with a $3,000 initial deposit. If you can’t swing the initial deposit, an even easier way is to buy stock in a AAA-rated corporation and set up a dividend reinvestment plan (DRIP), with zero ongoing costs at computershare.com. The companies we suggest you look at first are Johnson & Johnson (JNJ) and Exxon Mobil (XOM), and you can open your account for no more than the $250 initial investment followed by monthly $50 withdrawals from your checking account in the case of XOM. With JNJ, that automatic feature costs $1.00/mo but you can do it yourself at no cost by entering the website and making a $50 purchase each month. 

Never heard of a DRIP before? It stands for Dividend Re-Investment Plan. It automatically reinvests quarterly dividends by purchasing more of the same stock automatically (and typically at no cost to you). The reason why we recommend you use a DRIP is because 40% of the total returns from stock purchases come from reinvesting the dividends. More importantly, the companies we highlight in our blog grow their dividends approximately 10%/yr, regardless of economic conditions. As a retiree, you won’t be reinvesting dividends; instead, you’ll opt to receive the quarterly checks in the mail. In other words, YOUR PAY will be growing around 7%/yr faster than inflation.

Even though you start your Personal Retirement Plan at $50/mo, we strongly encourage you to constantly re-evaluate your spending and try to keep bumping the $50 upwards. What would $50/mo going to JNJ over the next 20 years give you, assuming 3% inflation and 15% taxes on the quarterly dividend payments that you re-invest? In other words, where does 5%/yr of real profit leave you in today’s dollars? The answer is $20,857, and by then you’d be receiving about $600/yr in dividends (which is the same amount you would have been putting in each year) that will grow faster than inflation. Looked at a different way, if you’d started investing $100/mo in JNJ 11.7 yrs ago (Table), you would now have a nest egg of $26,560. 

As you become more comfortable with your savings plan, you will eventually want to add a DRIP for the highest-quality electric utility: NextEra Energy (NEE). A savings plan made up of those 3 stocks, XOM, JNJ, NEE, will give you a profit (after inflation and taxes on dividends) of 6%/yr over time. Another sound practice is to have some retirement money in 10-yr US Treasury Notes. Those won’t leave you with any profit (after taxes on interest and inflation) but that asset class does increase in value during a recession. Recessions are a tricky time, particularly for those of you who are getting close to retirement age. Why? Because that’s when it is easy to get caught short of cash. You might be laid off, your kids might be in a bind, etc.. You don’t want to sell stocks to raise cash, because the stock market goes down an average of 31% in recessions. So sell your Treasury Notes.

Bottom Line: Life after divorce requires that you manage your money properly, and becoming a Gray Divorcee after age 50 doubly requires you to pay attention to retirement savings.

Risk Rating: 3

Full Disclosure: I purchase 10-yr Treasury Notes quarterly and contribute monthly to DRIPs in XOM, NEE, and JNJ.

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