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Robert Warner

Rebuilding Your Finances After Divorce: It’s All About the Financial Plan

Divorce is one of the most stressful experiences families encounter, especially its emotional aftermath. Even couples whose divorce is relatively amicable are likely to disagree at times during settlement negotiations that cover – and uncover – minute details of their lives.  While the emotions surrounding a divorce predominate, of equal or even greater importance is planning for your financial future.

Statistics show that as many as a third of marriages overall will end in divorce and as many as one in four for those age 50 and older.[i]  We recommend having a financial plan in place at any age and under any circumstances, but it’s even more important if you are contemplating or are in the midst of a divorce in order to lay a financial foundation for after the divorce and into retirement.

As a pilot, you already deal with high stress on a regular basis –  a recent study ranked airline pilot fourth among the most stressful jobs in 2014.[ii] And you are likely to have significant assets at stake in a divorce, including retirement accounts and other holdings, especially if you are mid-career or later.

We recommend working with professionals such as a divorce attorney and a financial advisor to gather the information you need and to help you make the best financial decisions for your future. Among the best strategies in post-divorce financial planning is avoiding common mistakes that can occur during the divorce process:

COMMON MISTAKES 

Using money as a weapon – Mixing financial decisions with the raw emotion that often surfaces in divorce can have disastrous results both short and long term. Deciding how to divide assets, child custody and who gets the house should be based as much as possible on what is best for you, your spouse and any children or other dependents. Decisions and choices based on emotion or getting even can have devastating effects on your long-term financial security.

Not tracking expenses – Most people know what their annual income is but they often don’t know how it’s spent each month. It’s critical for you to know how much money you will need to maintain your lifestyle after your divorce. That includes items such as insurance and discretionary spending for entertainment or vacations as well as for regular costs such as food, housing, medical, utilities and clothing.

Mismanaging retirement accounts – There are penalty and tax rules for retirement accounts if you receive a portion as part of a Qualified Domestic Relations Order (QDRO), which details how spouses will split retirement or pension accounts. A QDRO recognizes spousal ownership in these accounts and will generally award a portion of the plan participant’s benefit to a divorcing spouse. There is a 20% withholding tax for failing to transfer that retirement money to an IRA or other retirement account. And you must have a QDRO in place to avoid penalties and taxes on distributions before age 59½.

Retaining illiquid assets – It’s common in many divorces for one spouse to keep the couple’s primary home, with the other receiving cash, retirement accounts or other assets of equal value. Similar splits are made if one spouse owns a business.  Although such divisions of assets can be equal on paper, you could end up with a home or business that is difficult to value or sell. In addition, most homes have ongoing expenses such as upkeep and taxes. Consult an advisor before deciding whether to keep a home or business after a divorce.

Overlooking shared debt – You can be held responsible for joint loans, credit cards and other debt after a divorce even if your spouse is responsible under the terms of your divorce agreement. You might want to consider paying off all shared debt before finalizing your divorce to avoid any questions or unexpected payments.

GATHERING YOUR INFORMATION

You will need to gather all current financial records, detailing what you and your spouse own and owe, together and individually, along with lists of expenses and financial obligations.  Although this information is required once the divorce is under way, having it on hand as soon as possible can help reduce legal costs.

You and your advisors will determine how the income and assets that supported one household will support two after your divorce. That won’t be easy considering that living costs likely will double because you and your spouse will need two homes, double utilities, plus taxes and maintenance.

Your liabilities and expenses – This information will help establish your current standard of living and forecast what that can be after your divorce.  Liabilities include mortgages, lines of credit, credit cards, and any tax liabilities. Your list of expenses and cash needs should be thorough, covering items such as food, monthly mortgage or lease, purchase of your current or future home, utilities, insurance premiums, tuition, clothes, repairs, gas, memberships, vacations, dining out, entertainment, and attorney fees.

 List your assets – Compile a list of all of your assets and their value, even those that are owned jointly. Items should include your primary home, a secondary or vacation home and everything else you own, from furniture and vehicles to electronics, art and jewelry. You also will need to provide records on bank accounts, cash, safety deposit boxes, retirement, pension and investment accounts and anything else of value. You also should inform your attorney of any non-marital assets – items acquired before your marriage – even though they will not be part of a divorce agreement.

Tax and legal documents – You also will need five years of income tax returns, and all payroll statements and pay stubs. In addition, gather legal documents such as wills, financial powers of attorney, healthcare powers of attorney, living wills and trusts.

PLANNING FOR YOUR LIFE AFTER DIVORCE

Once you have compiled all of the information needed for your divorce agreement, you can begin to adjust your financial plan or create a plan if you don’t have one pending a final divorce settlement

This is also a time for you to make sure you have closed all joint banking, financial and credit card accounts and opened new ones in your name. You should also review and update beneficiaries on all of your investment, insurance and estate documents to ensure they match the provisions in your divorce agreement and that your wishes are carried out.

A comprehensive post-divorce financial plan should cover the lifestyle you desire and can afford and it should extend through your retirement. It should take into account cash flow, savings goals, potential changes in your tax situation and retirement planning. Realistically, a divorce can significantly reduce your assets making for some difficult choices about your future lifestyle.  You will need to decide where and how you would like to live, and determine whether your financial situation after your divorce will affect your ability to save for retirement, college tuition or any other goals or responsibilities you might have.

Tackling these questions and making decisions can be challenging, especially during or just after a divorce, when emotions are high and family relationships can be strained.  Your advisor can help you determine whether your investment strategy and allocations are appropriate for your post-divorce financial situation, your tolerance for risk and your saving and retirement goals.

A post-divorce financial plan can help you begin your life after divorce and take steps to achieve a comfortable future.

[i] https://www.bgsu.edu/content/dam/BGSU/college-of-arts-and-sciences/NCFMR/documents/Lin/The-Gray-Divorce.pdf

[ii] http://www.careercast.com/jobs-rated/most-stressful-jobs-2014

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Views and comments expressed in this blog are those of the author and do not necessarily represent the positions of Cleary Gull or fellow Cleary Gull associates.