Single Parents

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Biggest Challenge: Juggling higher expenses on lower income

Raising a child without a live-in partner is often as tough financially as it can be emotionally. According to the National Bureau of Economic Research, the family income of children whose parents divorce and remain divorced for at least six years falls by 40% to 45%. “Even when a divorce is pleasant,” says planner Lindsay, “the financial impact is severe.” The Allianz survey further backs up that view: Just 45% of single parents said they were on track for a comfortable retirement, vs. 57% of traditional families, while more than three-quarters reported being stressed by trying to simultaneously save for retirement and their child’s college tuition.

While alimony or child support can help defray day-to-day expenses, it often doesn’t make a meaningful dent in the killer cost of childcare, which is often an unavoidable expense for single parents with younger kids, says Lindsay. Moreover, as children grow older, many bills pop up—piano lessons, orthodontia, summer camp—that may not have been anticipated and accounted for in the original divorce agreement. “People create a divorce decree based on a small child’s expenses, and then things change,” Lindsay notes. Plus, support agreements generally end when the child turns 18—often without having worked out how college bills will be handled.

The Solution: Put yourself first.

Understandably, single parents are often deeply concerned about making sure their kids don’t get shafted when it comes to their future. In the Allianz survey, nearly half of the single-parent respondents named “saving for my kids’ education” as their main motivation for developing a financial plan, compared with only a quarter of other modern families.

So this will be tough to hear and perhaps tougher to implement, but it is your best path nonetheless: In the college-vs.-retirement savings quandary, your retirement wins. For one thing, as Rapid City, S.D., financial planner Rick Kahler points out, you can’t count on splitting retirement living costs with a significant other. And if you had to divide 401(k) or IRA assets with your former spouse, you’re probably further behind than you’d otherwise be at this stage of your life. Meanwhile, your child may qualify for financial aid (especially if your income and assets are lower as a result of your divorce) or can borrow as need be. And if absolutely necessary, you can also take out a loan against your 401(k) or withdraw money penalty-free from an IRA to pay for college, while these assets won’t be counted in the federal aid formula.

To get savings for both college and retirement on track, you may need to have a frank talk with your child about cutting back. That’s what librarian Joy Birdsong, 52, of Brooklyn did with her daughter, Savannah, 12, after filing for divorce last year. “All my assets have to be split,” says Birdsong. “I am responsible for Savannah’s upkeep, and preteens in 2014 have a lot of needs.” Birdsong sat down with Savannah and let her know that the latest iPhone and frequent trips to Starbucks were out. Says Birdsong: “I didn’t want to scare her, but I did let her know the situation was serious.”

And Don’t Forget…

Renegotiate with your ex. Look for equitable ways to split child expenses that weren’t outlined in your divorce agreement. An informal talk may suffice if you have a good relationship; enlist the aid of an attorney if you anticipate pushback.

Take care of the what-ifs. Create or update your will to name a guardian for your child (if your ex is not in the picture or dies before you). A testamentary trust will enable you to appoint someone to manage money you’ve left to your child on his behalf until he is no longer a minor.

Be tax-smart. Alimony is taxable income to the recipient; child support is not. Filing as a head of household usually results in a lower tax rate than filing as a single, says Bonnie Lee, author of Taxpertise.

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