Will You Be Able to Afford to Retire?

Thriving After Divorce

Sula is 46. She met her husband, Jim, 48, at the hospital where she was a nurse and he was doing his medical residency. Her salary helped support them while Jim was getting established as an orthopedist. She left her job when she got pregnant with their son, now 14, and hasn't worked since then. Last October Jim confessed that he was seeing another woman. He has since moved out of the house and they are discussing divorce. In addition to her other worries, she is concerned about how to ensure a secure retirement for herself.

From Candace Bahr and Ginita Wall, San Diego, California-based financial planners and cofounders of the Women's Institute for Financial Education:
When you're getting divorced, your future depends on the decisions you make today. So it's important to think carefully not just about what you want for the present but what you want long term.

Originally, Sula, like most women, wanted to trade her right to half of Jim's retirement savings for full equity in the house. But this is a bad idea: What would she retire on? Additionally, even though the equity in the house is worth about as much as the money in his retirement fund, Jim says it's not an equal trade because the retirement money will be taxed when he retires, so he wants to discount it accordingly. Finally, Sula won't be able to afford to maintain the property by herself -- and when her son goes to college in a few years the house will be too big for her.

The best choice for Sula would be to agree with Jim to sell the house and split the proceeds (and his retirement fund). Because she and Jim are still joint owners, the first $500,000 from the sale is free from capital gains tax. She and Jim can even delay selling the house until after their son leaves for college and still get the tax exclusion as long as Jim grants Sula sole use of the house. Sula would have to pay the mortgage every month but the cost of major repairs could be negotiated as part of the divorce settlement.

If they agree to the 50-50 split, Sula also needs to decide what to do about her portion of Jim's 401(k). She can roll it over into her own IRA or leave it with her husband's employer and get it at the earliest age he can retire. Given life's uncertainties, we'd advise Sula to transfer the money to an IRA that's under her own control. Sula should also realize that she may not end up receiving any of Jim's Social Security benefits. While they were married for more than 10 years and she is eligible for a derivative benefit equivalent to one-half of what Jim will receive, no double-dipping will be allowed. So if Sula goes back to work, her own benefit for her years of work will probably replace the derivative.

Sula needs to take a good hard look at how best to maximize her income -- and her potential to save. If she receives child support, the payments will run out in a few years (in most states when her son graduates from high school) and may not cover her expenses anyway. If Sula wants to go back to school, great -- investing in your own earning power is always smart. But a better bet may be to renew her nursing credentials, which could be faster and more economical. Talking to a career counselor would be worthwhile.

Above all, Sula needs to figure out how to save. The good news is that, even in her 40s, she can still save enough to ensure a comfortable retirement. But first she will probably have to face making do with half of what she lived on before. Women going through a divorce often resent cutting back, but learning to live on less will help Sula take charge of her life. Assuming control of her finances may seem daunting, but she has years to prepare and recover from any financial mistakes she might make.