I am 63 years old and recently divorced. I earn $ 68,000 per year and had always planned to retire when I reach full retirement age in March 2025. However, following the divorce, I now have $ 100,000 in debt. consumer unsecured and an additional $ 30,000 in student loans, and about $ 170,000 in my 401 (k).
It takes every penny I earn to fend for myself and pay off the debt service. My payment history is considered “exceptional” on all accounts (in Experian-Speak), but due to the overage, my FICO score is only around 650. If I were to retire today, I would would draw $ 1,200 per month in Social Security, or $ 1,400 per month if you draw on my ex-husband’s account (we had been married for 23 years). If I wait for my FRA, those numbers will drop to $ 1,500 and $ 1,800.
Do you have any advice for me?
See: Confused about Social Security – including spousal benefits, claim strategies and how death and divorce affect your monthly income?
I am sorry to hear that you are in this stressful situation. A divorce can wreak havoc on a person’s retirement security, not to mention their finances in general.
Debt management should be the priority now, financial advisers said. “His first step would be to try to get his debt under control,” said Michael Resnick, Certified Financial Planner and Senior Wealth Management Advisor at GCG Financial. “She might want to try refinancing her debt or, if it’s credit card debt, she might try to find a card that will accept her balance at a lower interest rate.”
There are several ways to pay off your debt. One strategy is to pay off debts with the highest interest rates, so that you pay as little interest as you need. Another choice is to pay minimums on all accounts except the card or the account with the smallest debt – this is where you would put extra money. When that account is paid off, move that extra cash flow to the next smallest debt, and so on. This is called the “snowball effect”.
Balance transfer credit cards, like the one suggested by Resnick, might have an introductory rate of 0%, which would be a great way to eliminate interest payments altogether and get the most out of your repayments. But these cards usually have a specific time frame for that 0% rate, say 15 or 18 months, until they skyrocket. If you go this route, it’s essential to have a repayment plan in place and a back-up plan if you can’t pay it back before the 0% promotion ends.
Another option is personal bankruptcy, Resnick said. This path requires serious thought, however, because there are consequences to going bankrupt. Bankruptcies stay on your credit report for up to 10 years, and many lenders may require people who file to wait four years before trying to get a home loan. The most common type of bankruptcy, known as Chapter 7, allows individuals to keep certain assets, such as wedding rings, certain equity and automobiles, and business tools (but the rules vary by state). The good news: Credit scores start to recover soon after filing for bankruptcy, and this route will protect the retirement assets of your qualified plan.
If the bankruptcy option doesn’t sound appealing to you, don’t worry. Matthew Benson, a certified financial planner and owner of Sonmore Financial, suggests setting a goal of paying off debt in two to three years, which may require finding additional income through overtime, taking a temporary side job or to postpone your planned retirement date. a bit back (which would “also boost retirement savings,” he said).
It sounds exhausting, maybe even a little overwhelming I’m sure, but Benson said he’s seen clients sacrifice that kind of time and energy to pay off huge debts. “It takes a goal to start cutting back on that,” Benson said.
Check out the MarketWatch column “Retirement tips” for practical advice for your own retirement savings journey
Remember, these are just suggestions – you need to do what you can to improve your situation and not burn yourself out further.
Now let’s move on to social security. When to claim Social Security is a very personal decision, but there are many ways to think about it for you. On the one hand, if you at least delay your full retirement age, you’ll get more money on your check each month, Benson said.
On the other hand, if you can’t increase your short-term income until you reach full retirement age, claiming early wouldn’t be the worst thing – and it would help you pay off your debt faster, said Resnick.
“I guess the interest rate on her consumer debt is higher than the growth factor of her Social Security, so if she can’t eliminate or refinance the debt, the early deposit might make sense,” he said. he declared.
Try to keep contributing to your 401 (k), but maybe just focus on meeting any employer and spending the rest of the money on debt, Benson said.
“This is a scenario where it’s very difficult to see your long term goals through the thickness of the debt,” he said. “I’m less concerned with the cost of debt and more focused on how can she be freed from debt so that she can have a realistic picture of what the future would look like.”
A financial advisor could help you navigate this new way of life – Resnick said he often recommends that people speak to a financial planner before a divorce is finalized to find strategies to ease the transition.
And remember, don’t be too hard on yourself during this difficult time. Divorce later in life has become much more common, and legal paperwork isn’t the only costly aspect. “It’s more expensive to live apart than together, which throws a big key into a financial plan,” Benson said. “A lot of times the two people going through a divorce have to make significant changes to their lifestyle today and their future goals to be able to make things work.”
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