Ask an Advisor: I'm Getting Divorced 5 Years Before Retirement. What Should I Do?

I’m 60 and plan to retire at 64 or 65, but I’m going through a divorce (my ex-wife will keep the house). Right now, my pension at work (I won’t receive Social Security) would provide me around 73% of my current gross income. If I wait a few more years, it will be a bit higher. I also have $200,000 in a 401(k).

What’s best for me to do financially in my last four or five working years? I have no desire to work after retiring unless it’s something fun, like being a part-time volunteer. Ideally, I would like to travel but I also have to help my kids save for college. My son (15) and my daughter (10) each have 529 plans, with $21,000 and $18,000, respectively.

– Rudy

It's good that you're starting to think about your future transition into retirement while you're still several years out. You're giving yourself plenty of time to get your finances in order and make any necessary changes to ensure you have a secure retirement. However, your divorce may bring some changes that affect how you need to navigate these last few years. (And if you want a more detailed analysis done, consider finding a financial advisor who offers retirement planning.)

Can You Cover Your Living Expenses?

The baseline for a comfortable retirement is ensuring you can reasonably cover your living expenses with the income you'll have. Fortunately, a pension that replaces a large percentage of your current income should make that a little easier to figure out.

If you were to retire today, your pension would cover 73% of your current gross income, but you plan on working for another four or five year years. As a result, you’ll need to calculate how much more income your pension will provide. Then, you can add your 401(k) withdrawals to get a better idea of what kind of a retirement income you’ll be working with.

As for your expenses, I suggest you go ahead and start thinking about what may change when you retire and estimate what your monthly expenses will be. How will your spending habits change? If you retire before you turn 65, what will you do for health insurance before becoming eligible for Medicare?

Some financial experts recommend replacing between 70% and 90% of your pre-retirement income. As you get closer to retirement, continue to refine your estimate so that it will be as accurate as possible. (But if you need help building a retirement income plan and budget, consider working with a financial advisor .)

Plan for Income Taxes

Keep in mind that once your divorce is final, your tax filing status and tax bracket will change. The difference between the income levels that place you in a certain federal tax bracket is meaningful so be sure to compare your current situation with what your new one will be.

For example, the 22% tax rate in 2024 applies to incomes between $94,300 and $201,050 if you're married and file a joint return. However, it only takes $47,150 to reach the 22% tax bracket if you're single. Your standard deduction is cut in half, as well, from $29,200 as a married couple to $14,600 as a single filer.

It may not make a big difference if your wife had a large income, but if you earned the majority of your family's income and will continue to earn the same amount, your tax liability will increase. (A financial advisor can help you with tax planning and incorporate tax efficiency in your financial plan.)

Where You'll Live

It's also a good idea to put some serious thought into where you plan to live in retirement. I want to highlight this point given your situation. Since your ex-wife is keeping your current house, you may want to take some additional time to figure out your plan.

That is perfectly reasonable, especially if you lived in the house for a long time and are now dealing with the emotional toll of moving out. It may be a good idea to rent for a short period even if you plan to ultimately buy something. However, renting throughout retirement is a route that many choose to take as well.

Whatever you decide to do, just make sure that your housing expenses are accounted for in your retirement plan. Your home can often represent a significant portion of your living expenses. (A financial advisor can also help you determine how much you can afford to spend on a home.)

Closing Any Gaps

Once you've assessed where you stand in terms of your ability to cover your retirement expenses, you can see if there’s any shortfall you need to make up, like saving for your kids’ college educations. If there is, you can focus these last few years on those needs.

Also remember that you qualify for catch-up contributions , meaning you can contribute up to $30,500 to your 401(k) in 2024. Maxing out your 401(k) over the next five years can really help you make up some ground if you’re behind on your retirement savings.

Lastly, if you can, try timing your retirement so you avoid making your first 401(k) withdrawals during a market downturn. If the market takes a dive right before you plan to stop working, waiting a little longer can provide you with significant protection from sequence risk by delaying your withdrawals. (Remember, a financial advisor can help you with risk management and withdrawal strategies in retirement.)

Bottom Line

With a goal of retiring in the next four or five years, the key is to follow through with your financial assessment and make any necessary changes. Your divorce poses some unique items to consider, such as a change to your tax filing status and living arrangement. If we run into a bear market as you prepare to retire, you may want to consider delaying retirement or holding off on your 401(k) withdrawals. Starting retirement in a down market can have an outsized negative impact on your long-term financial security.

Retirement Planning Tips

• If you have a tax-deferred retirement account like a 401(k) or a traditional IRA, you’ll need to start taking required minimum distributions (RMDs) from your account at age 73 (75 for people who turn 74 after Dec. 31, 2032). SmartAsset’s RMD calculator can help you estimate how much to withdraw and by when so you can avoid unnecessary tax penalties associated with failing to take the proper RMD.
• A financial advisor can help you navigate the sometimes complex world of retirement planning. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks .

Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you'd like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.

Photo credit: ©iStock.com/brizmaker, ©iStock.com/PeopleImages

The post Ask an Advisor: I'm Getting Divorced 5 Years Before Retirement. What Should I Do? appeared first on SmartReads by SmartAsset .