Going through a divorce is among life’s most difficult experiences. There is the potential for emotional, psychological, physical, economic, and social consequences. Since the divorce process can be so difficult, you might overlook issues that could impact your financial security and independence. We’ve highlighted below ten of the most important mistakes women make during a divorce.
1. Family Finances
Women should never allow themselves to become willfully ignorant of the family finances. Do we have retirement accounts? What type? Do we own stocks? Where are they? How much is our mortgage? All these questions help shape your financial present and future, and what your spouse may have chosen to do with funds could be against your interests in the event of divorce. Also, not paying close attention to the family financials can make it too easy or too tempting for the other spouse to try and conceal or secret assets.
2. Financial Independence vs. Child Rearing
Women should not consider the phrase “financial independence” as incompatible with child-rearing. Women after divorce can still serve as the primary caregiver and earn sufficient income to cover now and plan for the future. Budgeting should be a first step – know how much your key monthly expenses run and determine if scaling back may be necessary in the short run until you get more financially secure.
3. Keeping the Family Home
Your home provides comfort and security. It’s a very natural reaction to want to stay in your home when faced with the loss, adversity, and disruption that divorce brings. We often find that one spouse wants to remain in the home, and it’s often the wife who usually has several reasons for this. The most common reason given is to keep the children in their family home in an effort to minimize the changes they are experiencing. Unfortunately, it’s often not financially possible to remain in the family home. If you were able to afford the house before your divorce, it’s not a given that you’ll be able to after the fact. You should always assess your post-divorce financial situation prior to reaching a settlement or going to trial. Housing is usually your biggest expense post-divorce expense. Be honest and determine if you can really afford to live on your own in the family home. Don’t look at this decision in the short-term; rather, look at this as a long-term decision and whether remaining in the family home will prevent you from paying off debt, saving for retirement, having money available to pay for your children’s extracurricular activities, and not feeling as if you are living paycheck to paycheck.
4. Neglecting Tax Considerations in Your Settlement
When you’re negotiating your settlement, you must consider taxable consequences during the process. It’s often easy to forget that not all marital assets are treated alike once taxes are considered. A 40(k) with $1,000,000 is not equivalent to a home with a value of $1,000,000. A brokerage account with $500,000 and a cost basis of $200,000 is not equivalent to a whole life insurance policy with a $300,000 cash surrender value. A pension that provides an income of $2,500 per month is not equivalent to rental property income of $2,500 per month. Also, you must look at your annual income and your resulting tax bracket when looking at the taxable consequences. You should meet with a CPA who can help you evaluate your assets on a tax-equivalent basis.
5. Not Returning to Work
Consider a multitude of ways to get back into the job market. Do you have sufficient education or training for what pursuits interest you? If not, you should explore returning to school as an investment in your future. Also, you could start your own business and even work from home. Seek out internships in a field of interest to discover whether you would enjoy it and what it would take for you to make a good income. Do not shy away from networking – get out and mingle in a variety of professional and social settings to let people know you are available and looking for particular opportunities. And finally, find a mentor – someone who has been through a similar experience and who could help you with your career and life path post-divorce.
People who have been married often become accustomed to a lifestyle that is only possible because they are married. After a divorce, the economics for both spouses can change dramatically. Post-divorce, you are now splitting the same income but doubling the expenses you once shared with your spouse. There’s often a reluctance to change spending behavior, too, because experiencing even more change is undesirable, and because it may not be obvious that a change is necessary. The reality is that you will probably need to reduce your spending after a divorce to avoid incurring debt and to ensure that you will have enough money saved to fund retirement. The sooner you realize this and make the necessary adjustments, the more likely it is that you will be financially secure.
7. Overly Conservative Investments
Investments are typically split between the spouses as part of the final divorce judgment. You will need to determine an appropriate investment approach for your financial future. Women tend to be more conservative investors than men. They will often adopt a very conservative mix of investments post-divorce because of a desire to preserve what was received as part of their divorce judgment. The problem is that if you only focus on preserving principal, then you often will have very little growth of your investment portfolio. For your financial security, you will need to grow your investments at some reasonable rate that’s greater than the rate of inflation. You should meet with your financial advisor to discuss a post-divorce plan that will meet your needs.
8. Prioritizing College Over Retirement
Parents typically want to help their children obtain a college education. Couples who are married often agree to pay for some portion or all the educational costs for their kids. However, post-divorce it is often much more difficult for parents to support their own independent lives and pay for college for their children. Unfortunately, many parents commit dollars to pay for college that are then not available for their own long-term financial security. You need to determine during the settlement process your ability to fund college for your children post-divorce. If you cannot afford it, then don’t obligate yourself to pay for college. Instead, focus on how you can meet your own needs, both current and future.
9. Social Security
Most women going through a divorce don’t consider the benefits they will receive from Social Security until they reach an age at which they qualify for them. Social Security benefits are a significant income resource for most people, and, consequently, they should be considered carefully during a divorce. We have seen numerous situations in which a divorcing spouse didn’t understand the benefits that they could receive based on their own work history and, if they qualify, on the work history of an ex-spouse. We recommend starting your investigation to what you are entitled to and when by contacting your local Social Security Administration office to obtain the information and become well versed in your benefit options.
10. Estate Planning
Many divorcing couples do not have an estate plan. Post-divorce, each spouse should have a will, potentially a trust, a durable power of attorney for finances, and an advance health care directive. Also, you will want to change the beneficiary designations on your retirement accounts and life insurance policies. If you have minor children, you will also need to consider guardian arrangements in the event of your death and that of your former spouse. Divorce is very emotionally draining. So, there is a natural tendency to avoid other emotionally taxing subjects, like estate planning. However, the peace of mind that comes from knowing you’ve properly planned for the future will outweigh the discomfort and help your family avoid potential financial problems in the event of your death.
Should you need the advice of an experienced child custody attorney or have questions or concerns about your situation, know that we are here to help and ready to discuss those issues with you.