Choosing between the home and retirement

Divorcing individuals must often choose between homeownership and retirement readiness. The ongoing costs of homeownership may impact your ability to save for retirement each month. In addition, keeping the home in the divorce may mean giving up retirement assets.

We advise our clients not to make any decisions in divorce without first taking time to evaluate their financial goals, both for now and in the future. Our clients often hope to:

• Own a home,

• Save for retirement every month,

• Retire by a certain age,

• Pay down credit card debt,

• Help their kids through college, and

• Enjoy a post-divorce lifestyle equal to what they’re accustomed to.

For many couples in the Seattle area, the value of the family home makes up a significant portion of the overall assets available to be divided up in a divorce. In addition, owning the home as a single person (compared to as a married couple) often means there is less income available to pay for ongoing home expenses. Individuals hoping to keep the home in the divorce often must decide whether to prioritize homeownership over their other financial goals.

If you are divorcing and trying to understand how keeping the home will impact your ability to achieve other important financial goals, be sure to review these three questions.

Question 1: Can I realistically afford the home?

If owning a home is one of your financial goals, you must understand whether you can afford the home now and in the future. First, try to estimate what owning the home will cost month to month, and year to year. Start with the mortgage payment, which usually includes the principal, interest, and escrow (real estate tax and home insurance). Then, factor in utilities and the cost of routine maintenance and repair projects. Don’t forget to include the cost of seasonal expenses, and expenses that happen just once a year. Finally, factor in the cost of large one-off expenses, like a new roof, furnace, or water heater.

Once you have a good feel for what it will cost to own the home, consider your income. How do you expect your income to change in the future? If you will be paying or receiving child support or spousal maintenance, when will those payments end? If you are in the workforce, how do you anticipate your wages will change in the future?

Question 2: How will owning a home affect my ability to pay for other things that are important to me?

Now that you have a sense of the cost of owning the home, and how much income will be available to pay for expenses, it’s time to put the pieces together. In short, the more money you spend on home expenses, the less money will be available to go towards other goals.

How will paying for monthly home expenses impact your ability to save for retirement each month? Or to help your kids through college? Or to pay for other things that you were accustomed to having when you were married?

Question 3: If I get the home in the divorce, what other assets will I be giving up?

As we mentioned above, the family home often makes up a significant portion of the assets available to be divided up in a divorce.

Let’s look at an example:

Jim and Sandra are divorcing. They own a home that is valued at $800,000 (there is no mortgage). In addition to cash and investments, they each have retirement accounts. Altogether, their assets total $2,000,000. The value of their home and the value of their retirement accounts each account for about 40% of their total assets. Sandra has considered her financial goals; she would like to keep the home and be able to retire by age 65.

Jim and Sandra decide to split their assets 50/50, with each getting $1,000,000 worth of assets. Sandra has reflected on her goals and decided that she prioritizes keeping the home above her other financial goals.

If Sandra keeps the home, she will get the $800,000 of home equity and $200,000 of other assets. Sandra realizes that keeping the home will mean giving up over half of her 401(k) to Jim. In addition, Sandra has tallied the expenses to run the home and realized that the property is expensive to maintain. While she was previously able to make the maximum annual contribution to her 401(k), she will no longer be able to do that and still pay for all the home maintenance costs.

Leaving the divorce with about half of her retirement nest egg, coupled with having to reduce her annual 401(k) contribution, will mean Sandra will have to delay her retirement by several years.

Unfortunately, divorcing individuals must often choose between owning a home and staying on track for retirement. The ongoing costs of homeownership may impact your ability to save for retirement each month. In addition, keeping the home in the divorce may mean giving up retirement assets.

Reach out to Serene Divorce Planning at (425) 903-8188 if you would like help designing your divorce settlement to achieve your financial goals and priorities.

This information is educational in nature and should not be relied upon for legal or tax advice. Serene Divorce Planning LLC is not an attorney and does not provide legal or tax advice. Individuals seeking legal or tax advice should solicit the counsel of competent legal or tax professionals knowledgeable about the divorce laws in their own geographical areas. Serene Divorce Planning LLC does not sell or consult on securities.