When Financial Cheating Hurts Your Retirement Plan

Jessica Matthews knows what it’s like to be the victim of infidelity — the financial kind.

Ms. Matthews, herself a certified financial planner, dealt with it after she discovered years ago that her husband was hiding more than $30,000 in credit card debt. That rupture ended their marriage. But now she brings the experience to bear on helping her clients.

You can remain physically faithful to a spouse or partner in a relationship, yet betray trust in other ways. Financial infidelity not only damages, it can sever, a bond.

“If both parties are willing to communicate and take ownership of the situation, then getting back on track can certainly bring them closer together and rebuild trust within the relationship,” said Ms. Matthews, of the Dallas-Fort Worth area. “We are all human, and with humanity there is not perfection, but there is love and compassion.”

Not only does financial cheating destroy trust, it can interrupt saving for a dignified retirement. Yet many couples devastated by partners who secretly overspend and get into crippling debt can still recover.

Financial infidelity is a many-headed beast: It could be debts accumulated before a marriage that go undisclosed, a secret account, unbridled credit card bills or money problems triggered by substance abuse or a gambling addiction.

In a recent survey conducted by the National Endowment for Financial Education, a surprising number of spouses admitted to having been financially unfaithful. Two in five people polled said they had “committed some act of financial deception,” and 85 percent of those people said the indiscretion affected the relationship, with the effects varying from the low level — an argument — to separation or divorce.

Billy Hensley, the president and chief executive of the endowment, said his organization has been conducting the survey since 2010. Given that nearly half of those surveyed admitted to being dishonest about their finances — something most Americans are loath to talk about — “these outright deceptions are still pretty alarming,” Mr. Hensley said.

The leading forms of financial deception, according to the endowment’s poll, were hiding bank accounts, statements, bills or cash from a partner or spouse. One in five people said they had lied to their partner when dealing with finances, debt or income.

According to a 2019 study published in the Journal of Consumer Research, when partners don’t trust each other with money, it can disrupt their entire relationship and can lead to estrangement or divorce. Extensive research shows that conflicts over money are one of the leading causes of divorce. The linchpin is rebuilding trust.

Of course, financial indiscretions often have psychological roots that are best addressed by counselors and therapists. Yet professionals almost universally recommend that the financially unfaithful partner come clean about their money issues.

You probably need professional help

Financial planners can help couples get back on track by putting core spending issues on the table. Then they can suggest budgeting and savings plans to reboot emergency, medium-term and retirement funding. They often serve as facilitators, referees and financial guidance counselors.

Jay Zigmont, a certified financial planner in Water Valley, Miss., is helping a client work though her husband’s financial issues. The husband’s business had accumulated large tax debts he didn’t initially disclose to his wife. The couple’s situation reflected one common element that Dr. Zigmont has seen in dealing with financial deception: One partner insists they are managing the couple’s financial life exclusively, although they may not disclose the reality of the family’s income, spending and debts.

“I see this a lot in couples,” Dr. Zigmont said. “One partner says they are ‘handling’ financial matters.” Even if one person handles bill paying, he said, both need to be intimately involved in budgeting, taxes and managing the family’s overall finances.

Financial infidelity, of course, usually doesn’t occur in an open and honest emotional relationship. The behavior could stem from problems such as substance abuse, chronic overspending and getting mired in credit card and other debt. Couples may have to file for personal bankruptcy, although they will still need to address the nature of their overspending issues to move forward — if they can.

Most people with this challenge, Dr. Zigmont said, will find their retirement plans take a huge hit because their ability to save is hamstrung. Every option will have to be examined, including negotiating payment plans with creditors and selling assets. But even declaring bankruptcy is not a cure.

“The problem with bankruptcy is that it does not change the behaviors, and not all debt can be discharged in bankruptcy,” he said. “It may be more painful to pay off the debts over time, but it can help teach good financial behaviors and even bring the couple together as they work towards common goals.”

With counseling and professional financial guidance, couples can avoid cascading failures that can completely derail retirement planning. One move he often sees spouses employ doesn’t end up being a solution.

“For example, it is common to see 401(k) loans — or complete withdrawals, especially during the Covid period — to try to Band-Aid the situation,” he said. “The problem with 401(k) loans is that you have now stolen from your future to pay a past debt. The worst case is then if you lose your job, the 401(k) loan becomes immediately due; otherwise, it gets taxed.” The taxes would be in addition to a potential 10 percent penalty, which the I.R.S. applies to people making withdrawals before age 59.5 — except under certain circumstances.

Getting back to basics

Ms. Matthews, who is also a certified divorce financial analyst, advises clients to start with the fundamentals when addressing financial infidelity. “What does your income look like relative to your debts, also known as a debt-to-income ratio?” she said. She urges clients to engage in goal modification, or revising financial expectations.

The lower your debts relative to your income, the better your prospects for recovery. For credit card debt, she suggests paying off the highest-interest debt first, “so you don’t get further down that hole.”

It’s only after you clear your debts, Dr. Zigmont says, that you can think about saving for retirement.

Still, the recovery process and resulting decisions, Ms. Matthews said, are difficult. “Can you afford to stay in your present home without negatively impacting your ability to retire? Sometimes you have to downsize your house, or you may have to work longer,” she said. “You have to look at scenarios that are the least disruptive.” Your entire vision for your retirement might have to change, she said.

Most qualified financial planners will put you through the paces of getting your spending aligned with your income, saving for short-term goals like college financing and, eventually, retirement savings. One essential note in rebuilding your retirement plan: Take full advantage of tax-deferred compounding in retirement plans.

“It’s possible to max out your tax-deferred savings vehicles like 401(k)s and I.R.A.s. Anything that gives you a tax advantage — fill those buckets first,” Ms. Matthews said.

Once you are in a position to save, and if you have access to an employer-sponsored plan, know this: For 2022, you can contribute $20,500 to your 401(k), 403(b) or 457 plan. Add another $6,500 a year if you’re over 50. Individual Retirement Account contributions max out at $6,000 annually, with an over-50 “catch-up” contribution of $1,000. Most certified financial planners, especially those who work on an hourly basis, flat fee or retainer, can reorient couples with a budgeting plan and funding retirement.

Avoid financial consultants and advisers who work on commission. Your greatest need is someone who can provide a focused service that stresses recovery and a plan, not a product. Sometimes an objective, trained third party is the best person to keep you on track for the long term.

But, you might need therapy

Of course, while they often provide support to couples working through money conflicts, financial professionals typically don’t offer the full suite of emotional and relational services. You may need a counselor, social worker or therapist if your situation demands more than financial assistance. If the issues are irreconcilable, engaging a lawyer and a certified divorce financial analyst who specializes in helping clients with their asset division is another viable option. You can also work with a certified credit counselor.

“When trust is broken, it’s best to seek professional counseling to rebuild trust and communication,” Ms. Matthews adds. Specialists like financial therapists may be able to help.

Without a doubt, the fracturing of a bond is deeply distressing for couples, although sometimes it can lead to a better relationship. As Mr. Hensley of the financial education endowment said: “With one in five of those surveyed, the financial deception caused the couple to draw closer together and communicate proactively.”