Prior to divorce, a couple has lived together as a unit in a household supporting one another and their children. Post-divorce, this couple becomes separate individuals with two households each must individually support as well as the care of the children. Mutual financial goals for the future, like retirement benefits, become divided. Divorce exposes the inequity in a given marriage, and the spouse with lesser earning capacity or assets may feel vulnerable, even if that spouse receives maintenance as part of the divorce. If financial health is a prime goal post-divorce – and it should be – what can a spouse do to assure that financial health?
First, take stock. What assets will you need to receive from the divorce? What liabilities can you avoid, what must you assume? What is a reasonable budget post-divorce based on income, support obligations and the need to plan for your children’s needs? Until you know what you can reasonably afford, you cannot tell whether you have a “financial illness” or not.
Second, begin looking at different budget scenarios. If I downsize my residence and streamline other expenses, what would I save and how would I apportion it? In doing these exercises, you can determine a financial path that lets you live leaner now for longer term stability come retirement, or live a bit more stylish with some level of risk. Your age and whether you have children (and their age) will determine the likelihood of each scenario.
Third, after deciding on what lifestyle choice you feel comfortable pursuing, factor that into any potential property division through the divorce. Can you sustain the mortgage on the marital residence? Will you be able to continue to contribute to retirement and college funds? Do your children have extracurriculars that you included in your calculations?
Fourth, think very hard about retirement. If you are younger with young children, you will have years of work ahead to rebuild a retirement and you may feel like sacrificing some retirement for cash for the kids makes sense, perhaps as a down payment on a house. If you are older, with fewer years of work remaining, you will want to think about a fixed income budget and maximize those benefits – Social Security, your own work benefits, and those accrued during the marriage.
Fifth, remember that choices have tax consequences. For example, if you sell the home and do not put the proceeds into a new home, you will have to pay capital gains tax. If you decide you need to access retirement funds now, you will pay tax on those sums as income. It may prove prudent to forego certain decisions because of the high tax cost.
Sixth, update beneficiaries of your accounts – checking, saving, retirement, insurance – so that the individuals you want to benefit receive those funds, and use trusts to protect your children.
Finally, consider using insurance policies to cover key contingencies. If you rely on your former spouse for maintenance and child support, you should insist that your divorce settlement contain a requirement that the former spouse maintain an insurance policy to cover that full amount in the event of that spouse’s early demise.
These are just some key considerations in pursuing financial wellness post divorce. Other tips depend on your personal circumstances and you should discuss these with your financial advisor and your attorney.
If you have questions about financial health post divorce, contact us – we can help.