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Financial Planning After Divorce

Overview

“I am a CDFA® Professional” – A Certified Divorce Financial A is someone who comes from a financial planning, accounting or legal background and goes through an intensive training program to become skilled in analyzing and providing expertise related to the financial issues of divorce

If you don’t know what to do, don’t do anything

Divorce can be a very challenging and emotionally exhausting process. During this time, focusing on your personal finances is likely one of the last things you may want to do. But understanding your financial situation, and taking the right steps to strengthen it, is critical to regaining your independence after a divorce and rebuilding your wealth.

One of the unfortunate facts about divorce is that both partners will generally be financially worse off after the divorce.  This is because the same amount of income will have to support the cost of two households rather than just one.  So, it’s critical to examine and thoroughly understand your finances during a divorce. If you suddenly find yourself getting divorced, you may also find you’ll be expected to live on less than you anticipated, in years where you earn less income. You may be forced to re-enter the workplace or work longer than expected. These are reasons why financial planning becomes crucial in late-life divorces. In particular, it makes sense to:

• Assess Your Finances:

The foundation of your post-divorce financial planning should be an honest, objective assessment of your finances. Take stock of your current financial situation. What resources did you receive as part of your divorce settlement?  Will you be receiving any spousal support or child support?  Have you received a share of any retirement or investment accounts, or perhaps a share of your ex-spouse’s defined benefit pension? As you’re making the inventory of your financial resources, you’ll also want to begin building your post-divorce budget.  Be as accurate as you can, and remember that some expenses won’t change much from year to year (your “core” living expenses, like your cost of housing, food, utilities, insurance, and clothing), while others will be much more flexible (things like vacations, new cars, home upgrades, charitable gifts, and so on). You should include saving for retirement as part of your budget and your post-divorce financial planning.  Most Americans are woefully unprepared for retirement, but if you build your budget with retirement savings included, you’ll help secure your financial independence and start rebuilding your wealth. Finally, don’t forget to factor in any one-time expenses that you’ll incur as a result of your divorce, like moving, furnishing a new home, etc.

• Get Creative to Save Money:

During and immediately after your divorce, you should track your spending very closely until you’re sure what your income and expenses will be when you’re living independently. This will give you an opportunity to find creative ways to potentially save money. Can you start your own garden, or begin dining out less? Can you “cut the cord” and lower or eliminate your monthly cable bill, and discover free entertainment in your community? Can you drive a less expensive, more efficient vehicle, or even use public transit more often? Sticking to the post-divorce budget you made will give you much greater financial flexibility today and in the future. And financial flexibility is key to gaining and maintaining financial independence.

• Look for Ways to Increase Income:

Once you’ve objectively assessed your financial situation and have built your detailed post-divorce budget, you may find that you won’t have enough income to maintain the lifestyle you had before your divorce. An important aspect of gaining and maintaining financial independence is living within your means. Doing so will give you a sense of control over your financial life, which is important to bouncing back from your divorce. So, if the budget you built is realistic, and you don’t have room to easily reduce your expenses, you’ll want to look for ways to generate more income. Can you find a higher-paying job in your field? Can you invest in yourself by taking additional coursework or training, which will lead to a pay increase? Will relocating to a new area offer greater employment opportunities? By consistently earning more than you spend, you’ll be able to rebuild your wealth more quickly, and ensure a secure financial future.

• Save For Retirement:

Saving for retirement is an essential part of post divorce financial planning and building wealth, because the money you save today will be the source of your income in retirement. After a major life change like divorce, it can be tempting to put something like saving for the future on the back-burner, or on hold. But it’s important to continue saving for retirement during and after your divorce. Every dollar you’re able to save will help you gain and maintain financial independence and ensure a secure retirement. And as part of the divorce settlement process, you’ll want to make sure that you update the beneficiary designations on your retirement accounts and insurance policies, taking into account any agreements you made in the settlement. And you’ll want to make sure any non-retirement accounts are properly retitled. You may want to consult an estate planning attorney for guidance.

• Health Concerns:

Serious health conditions can influence how a marital estate is divided and whether one spouse needs alimony, especially if that spouse isn’t able to earn income and doesn’t have sufficient assets to live on. And a spouse with serious cognitive impairments (Alzheimer’s or other dementia) may need a court-appointed guardian or guardian ad litem (a representative appointed by the divorce judge) to provide surrogate decision making. The cost and availability of health care are major concerns for those over age 50 who are trying to bridge the gap to Medicare eligibility.

• Estate Planning:

During and after your divorce, it’s important to evaluate the beneficiaries you’ve designated in wills or retirement plans, as well as agent designations in medical directives or powers of attorney, to be sure your documents reflect your wishes. Estate planning can be an integral part of your divorce settlement in a number of ways.

    • You may want to negotiate to receive or provide death benefits from life insurance, a retirement plan, a will, or a trust.
    • A will or life insurance policy can provide security for debts, alimony, and property buyouts.
    • Your divorce settlement can establish trusts to provide for agreed-upon responsibilities such as grandchildren’s education or financial support for adult children.

• Other Special Issues:

A few other issues unique to late-life divorces are worth noting. One is the role of adult children, who do not escape the emotional impact of their parents’ divorce — especially if they’re still financially dependent. In turn, adult children can affect their parents’ divorce (for better or worse) by taking on a variety of roles ranging from “Confidante” to “Fixer.” Another unique late-life divorce question is whether to resolve financial issues through a separation and a postmarital agreement, rather than via a full-fledged legal divorce. Leaving the legal marriage intact while settling the financial picture can allow spouses to:

    • keep marital status intact until a spouse becomes eligible for Medicare
    • bring a military marriage to the 10-year or 20-year point that entitles the civilian spouse to receive certain benefits
    • meet the 10-year eligibility when a “former spouse” is eligible for Social Security benefits
    • defuse financial inequities, or
    • stay married for personal or religious reasons.