5 Essential Tips for Financial Planning After Divorce
Splitting with your ex is traumatic enough. Don't let the money side stress you, as well.
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Divorce is about severing ties and starting over, at the same time. Having a financial plan can help secure your future and give you peace of mind, but this process isn't without its challenges.
"You have to reassess everything," says chartered financial analyst Robert Stammers, director of investor education for the CFA Institute. "Everything you do is built on a set of future goals, and these change when you get divorced. Your future goals aren't going to be the same; they're no longer in connection with someone else."
While untangling your marital finances, then, think about how to fund the divorce along with your new life.
As Laura Pilz, financial advisor at Merrill Lynch Wealth Management, says, "One of the fundamental financial planning rules is that oftentimes, when people get divorced, they think they're entitled to the life they've been living. What 'divorce' means is that you'll get a life that's 50/50. You're not guaranteed that you'll maintain the lifestyle that you've become accustomed to."
Separating emotions from financial decisions makes for smarter choices, too. "Marriage is about love, and divorce is about money," says Gabrielle Clemens, vice president of investments at UBS Financial Services. "As you go through the process of divorce, everything comes down to the concept of money."
To deal with that concept, here are financial planning strategies to consider.
1. Review your financials and expenses.
"Many people get divorced and then they deal with the consequences," says Pilz. "The people who do this most successfully think about their finances before they sign the divorce decree."
As you review your financial situation, look at your income sources, expenses, assets and tax situation. While every divorce is different, maintaining two separate households is more expensive than one. "In order for you to know what you have to spend after the divorce, you have to know what you were spending before the divorce," says Tracy Stewart, a certified public accountant and personal financial specialist in College Station, Texas.
Start by reviewing your past year's credit card and bank statements. Summarize expenses by category, and create separate columns for Mom, Dad and children. Once you've tallied everything, you'll have a better idea of what you can afford going forward and can decide how to use that money after the divorce.
As you go through this process, if you've got children, be sure you can cover their costs, including potential future expenses like braces, cars, insurance and activities. If child support is a part of your budget, remember that this amount can go up as your income increases.
2. Budget for alimony.
The length of the marriage, the possibility that one partner didn't work and for how long and the assets that that spouse will receive as part of the settlement all determine whether alimony is part of the settlement.
"In long-term marriages where someone hasn't worked for a long period of time, someone might get permanent maintenance, but this doesn't always mean 'permanent,' because people retire or may not be able to work," says Brian Blitz, a principal at Berger Schatz. Alimony may also end if the recipient cohabits or remarries.
Alimony further impacts both people's budgets and their tax situation. While nontaxable alimony is paid from after-tax dollars and is tax-free to the receiver, most people receive taxable alimony, which is tax-deductible to the payer and taxable to the receiver.
Those paying taxes on alimony need to budget carefully and pay taxes accordingly -- $10,000 per month in alimony, for example, results in a net cash flow of $6,500 to $7,000 per month, depending on the tax bracket and deductions.
Sometimes, your settlement and alimony can be renegotiated, but don't count on this. If a payer's income goes down though, "Go back to court and get a reduction. Don't wait," says Randy Kessler, founding partner of Kessler & Solomiany. "Most states don't have a statute of limitations, and you'll have to pay it. You can't go off the hook retroactively."
Alimony isn't for forever, though, and recipients have to plan for when these payments will end. "This means you have to get back into the workforce and get training to do this, and get on a budget, so you can save money," says Blitz.
3. Plan your career.
Getting back into the workforce may seem daunting, but there are many benefits. Your salary will help with your financial plan, and your job will help with your self-confidence, happiness and social life; work is a great place to meet new people. "Think about the long-term projections and not being beholden to anyone else," says Blitz. "All of those things will benefit you."
Those who have been out of the workforce for some time may need education or training to obtain marketable skills. "During the divorce, you should be thinking in terms of what you need to do to get a career," says Stewart. "If you need a degree or training, you negotiate during the divorce for your spouse to pay for this. Often, in a collaborative divorce, your partner will want to see that you can make ends meet; and if you ask for help paying for your education or training, your partner may offer to help, but you have to ask."
Research the training you'll need first, along with the cost for any tuition, books, parking, lab fees, computers or printers, as well as the duration for how long it will take.
4. Consider downsizing your home.
People try not to disrupt their children's lives after a divorce, by continuing to live in the family home. "That's often the beginning of a very difficult situation because it costs a lot of money and the house is not liquid," says Pilz.
Moving can be an emotional decision, but your family home is also an investment asset that's part of your portfolio. Since you'll have to pay for this home with one income, if your budget's tight, moving to a less expensive home or renting may be a good option to consider. Factor into your decision how much utility the home provides you.
"If your home is a huge portion of your wealth, it might make sense to diversify your assets," says Stammers. "You need to approach it as an investment asset, and you need to make decisions from that context as well."
5. Don't forget health insurance.
Health insurance could be a substantial expense if you used to be on your spouse's policy. COBRA is an option but an expensive one, and it lasts for only 36 months. So begin to look for your own policy even before you're divorced. "Part of the reason to work again is to help pay for your health benefits," says Clemens.
Working again will also help bring in the income, professional connections and self-confidence you'll need after a divorce, hopefully convincing you that there is, indeed, life and financial well-being, even after a divorce.