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Divorce can derail retirement plans

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(Special) - Going through a divorce is difficult at any age, but grey divorces involving couples 50 years or older can have a major impact on their retirement plans and assets like an RRSP.

A recent study by Winnipeg-based Investors Group found that about 80 per cent of grey divorcees say they will probably delay their retirement because they need to work long than planned and 62 per cent said their post-divorce savings and investments will no longer be adequate to fund their retirement.

"In a divorce you might feel emotionally liberated but financially you could be a lot worse off," says Chris Buttigieg, Senior Manager, Wealth Planning Strategy with BMO Financial Group. "Divorce poses some really challenges for people when retirement is around the corner."

In case of separation or divorce, either you or your spouse can transfer existing RRSPs to the other without being subject to tax provided you are living apart when property and assets are settled and provided you have a written separation agreement or a court order.

A couple's RRSPs often are split between partners during a divorce, but a lot of what happens will depend on the terms of the settlement.

Attribution rules (tax rules to prevent excess income splitting) regarding spousal RRSP and RRIF (registered retirement income fund) withdrawals will not apply to any withdrawals made after you and your spouse have begun to live separately and apart. Your soon-to-be-ex can continue to make spousal RRSP contributions to your spousal RRSP until the date you cease to be spouses, or the date of divorce.

"Women tend to have more attachment to the home but liquid assets tend to go the other spouse," Buttigieg says. "In cases like these there's a danger of becoming house rich and cash poor and finding yourself in the situation of wondering how you're going to carry the house and expenses."

One of the big problems with divorce is that it is often a bitter experience, which can affect your judgement.

The Investors Group study found that people who characterized their divorce as bitter experienced greater financial difficulties than those whose divorce was more cordial, such as managing living expenses after the divorce or separation, stress from the division of assets, the cost of divorce proceedings and no longer having enough retirement savings.

"Divorce is an emotional process that can cloud your ability to make sound financial decisions that will ultimately affect your future," says Christine Van Cauwenberghe, Assistant Vice President of Tax and Estate Planning with Investors Group. "With limited earning power and less time to recoup financial losses, grey divorcees need to re-visit their financial plans."

A good financial planner will help you assess your financial situation, clarify your goals as a new single person and advise you on what you can do to meet those goals.

If you're coming out of a divorce set up a budget, review all expenses and start to build your own retirement plan, which should include contributing to an RRSP or, if you're in a lower income tax bracket and can't take advantage of the tax deferred savings of RRSP contributions, maximize your contributions to a Tax Free Savings Account.

"You've got to take charge of your situation and recalibrate your plan and goals," Buttigieg says. "It's always important to try and get some liquid assets from the divorce and then recalibrate your financial plan and investments for things like risk tolerance, beneficiary designations, expenses and insurance on your ex-spouse if they provide support."

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Copyright 2014 Talbot Boggs

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