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The Cost of Gray Divorce in Railroad Retirement Thumbnail

The Cost of Gray Divorce in Railroad Retirement

Video Retirement Financial Planning


Learn about the hidden costs of getting divorced in Railroad Retirement. Welcome, everyone, to the Railroad Retirement Whiteboard. My name's John McNamara of Highball Advisors, and today we're going to talk, not a great subject, but we're going to talk about divorce, especially divorce as we get into Railroad Retirement, right? Some of those costs that really can have a significant impact. I'm going to just walk through that and just give everybody a glimpse into divorce. All right? And the impact thereof.

When we look on the income side here over on my right, your left, right, you have multiple streams of income in retirement, and you'll have the tier two, you'll draw down your 401k, and you might have a pension. Okay? Then a tier one also, which is social security. Now, this side here, the tier two, 401k and the pension, right, those can all be part of a divorce settlement called a QDRO, right? Up to 50%, over 50% can go to the spouse, right? So, you could lose 50% of your assets there. The tier one does not get affected by the QDRO.

Now, however, there could be alimony involved because a judge could say at the end, say, "Well, your lifestyle, even after all this, isn't equal to the lifestyle of your spouse. We're going to take some more money or you're going to be required to pay alimony to balance everything out." There's significant impact loss on divorce. Around 50% is what to expect. Right? So, not only that, that's the income side of the ledger, now we move to the cost side of the ledger, right?

Pre divorce, you have one house, one set of utility bills, one cable bill. You're traveling together in a hotel room, maintenance on the house. All the expenses that you guys can think of are in there. Now you come post and it's two of everything, right. Two houses, two cable bills, two mobile phone bills, all those things, right? No more family plan, that type of thing, maintenance. You can expect, they estimate, between 25 to 50% increases in expenses, right? That's significant, especially retirement, because you're dealing on fixed incomes, right? Or guaranteed retirement income streams. Right? All those are getting reduced by up towards of 50% and our expenses are going up by 25 to 50%. That's very, very, very expensive.

Let's work through an example to kind of really highlight these costs that we're talking about. Pre, right, you're filing marriage file jointly, right? That's your tax status, so there's advantages just in that alone, in that tax filing status. Let's say you have $110,000 worth of income coming in, and 50,000 of it's from Railroad Retirement annuity, another 60,000 is investment income, right, from drawing down your 401k, and you'll pay $12,000 a year in federal and state taxes off of that, and that'll you $98,000 net. All right?

So, you've got $98,000 and your expenses pre are 25 to 50% less. Now we go post, you're filing single, right? So now let's do it as tax status, right? Your income is half at $55,000 now, right? Half of 110, and your tax is going to be 7,000 because of the single status versus filing jointly. Now you're at $48,000. Okay? So, you're already down $2,000 already on that. The problem here is pre. Right? You have $98,000, okay? To replicate that lifestyle of that pre lifestyle, because all our expenses are going up just at 25%. you need $122,500 in the divorce lifestyle to equal that pre lifestyle.

So, as you can tell, there's very significant expenses and costs associated with a divorce. Couples, as you're doing your retirement planning, it's really wise just looking at this to invest into the relationship, as much as you are investing in your portfolio, to be perfectly honest with you. Like I said, not a great subject, but hopefully I can highlight some things and some issues that are good conversation starters, all those types of things. Please, everyone, subscribe to my YouTube channel. The channel's growing well. I'd like to try and get over 1,000 subscribers, that'd be great, in the new year here, 2021. In the meantime, everyone, please stay safe, stay on track, and take care. So long, everybody. Bye.

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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved.from Highball Advisors, and all rights are reserved.