Few events create as much emotional and financial stress as a divorce. On the emotional side of the equation, it’s natural to experience sadness, anger, worry, embarrassment, and even relief. On the financial side, you may wonder, how will a divorce impact my finances? Will I need to change my lifestyle? What steps do I need to take to update my financial plan? If you’re going through a divorce, it can be difficult to fully understand how your life may change after divorce. Having support for your emotional needs, as well as trusted advisors for your legal and financial needs, can make a big difference. Here are some practical tips for keeping your life – and your finances – on track before, during and after a divorce.
Step One: Build a Support Network
If you’re considering a divorce, it’s a good idea to build a support network, both for expressing your emotions and thinking through the legal and financial consequences that divorce may entail. “In my experience, when people don’t get information and support through the divorce process, they tend to experience much greater fears and feelings of being overwhelmed,” says Susan Pease, director of the Transition Institute of Marin, which offers education, resources and coaching for women and men who may be considering or going through a divorce. “My advice would be to seek out some type of support, which could include one-on-one therapy or a group of people who are also going through divorce. By doing so, you will have a place to vent your fears and feelings, get reality checks and hear what others are experiencing.” Next, she recommends learning how divorce will impact your particular situation. “When you know more about what you are dealing with, you’ll likely feel more empowered,” she concludes.
As a practical matter, you’ll need to consider different options for negotiating your divorce settlement and terms, which may include hiring an attorney, a divorce mediator or engaging in a collaborative divorce process. “It’s important to do some research,” says Pease. “Read books, talk to people you know who have divorced and interview a variety of attorneys before deciding which approach may best suit your personal situation.” She notes that Nolo Press offers a wide range of books, such as Divorce Solutions: How to Make Any Divorce Better (Divorce Solutions)
At this time, you may also want to consider hiring an independent financial advisor – one who represents just you, rather than you and your spouse – to help you evaluate any settlement offers and make informed financial decisions before, during and after your divorce. A financial advisor can help you determine what it may take to maintain your current lifestyle, including areas that are easy to overlook, such as property taxes, your retirement needs and the future educational needs of your children. As with choosing any financial professional, choosing a financial advisor often begins with referrals, either from friends or family, or from other trusted advisors, such as your attorney, CPA or estate planning specialist. Most reputable financial advisors will be willing to have an initial conversation or consultation with you free of charge to learn more about your needs, help you understand the advisor’s role and give you a chance to ask questions. In addition, you may want to interview more than one advisor to find one who truly understands your situation and needs.
Step Two: Focus on the Details
Children, pets, friendships, real estate, and personal property are all sensitive topics that must be addressed and negotiated during a divorce. These are often demanding topics and may take precedence over the basic financial settlement. Whether you’ve joined a support group, are working with a therapist or are relying on friends and family for support, try to articulate the goals that are most important to you in a supportive environment so that you can stay focused on achieving your goals throughout the divorce process. While your goals will be uniquely your own, common goals you may want to consider include spending certain holidays with your children, keeping a house where you currently live and ensuring a comfortable financial future.
At this point, it’s also important to take a closer look at the nuts and bolts of your finances, both as individuals and as a couple. California is a community property state, which means that certain assets acquired by either you or your spouse during a marriage may be considered joint property. However, even if you’re married, it’s still possible for you and your spouse to hold assets separately. The types of assets that are often held separately may include inheritances received from family members or assets owned prior to the marriage. Accordingly, you’ll need to examine the titles to all major assets – such as houses, bank accounts, and cars – to determine whether the assets are currently being held jointly or separately. Because of the complex nature of property ownership in California, it can be especially helpful to have professional advice when reviewing your financial assets.
If you decide to hire a professional financial advisor, your advisor can also give you an objective perspective on how much money you may need following your divorce to achieve your financial goals. For example, your financial advisor can help you consider the differences between liquid assets with the potential to produce income (such as stocks, bonds and cash) and fixed assets (such as houses and cars) that may incur ongoing expenses. If you are a non-working spouse, you may be entitled to a portion of your spouse’s retirement plan assets; however, those assets generally can’t be accessed until age 59-1/2 without incurring tax penalties, so they shouldn’t be considered as income until you reach retirement age. Leading advisors use sophisticated financial modeling tools to help you understand the probability of meeting your long-term goals.
Step Three: Create a New Financial Roadmap
Once the dust has settled and your divorce has been finalized, it’s time to create a new financial plan. Your financial plan is the roadmap that keeps you on the right track for achieving your financial goals. Your financial advisor, also known as a wealth manager if he or she is providing comprehensive guidance and advice, can help you update your financial plan based on your personal needs and objectives. As a starting point, your advisor should conduct a thorough interview and discovery process to learn more about your financial situation, including your assets, fixed expenses and tolerance for investment risk. In some cases, one spouse has traditionally managed the family investments, leaving the other spouse less prepared to make financial decisions. Hiring an independent financial advisor or wealth manager can help you address your individual needs and feel more empowered about your financial future.
If you decide to interview potential wealth managers, keep in mind that a comprehensive financial plan should include the following components:
- Asset allocation plan – Determining the right mix of stocks, bonds and other investments to meet your needs
- Tax-smart investment strategies – Minimizing taxes can help enhance your wealth and make the most of your assets
- Updating your wills and living trusts – A thoughtful estate plan is essential to making sure that your wishes are honored in the event of your death
- Comprehensive retirement plan – Identifying where, when and how you plan to retire and creating specific strategies for achieving those goals
An experienced wealth manager will not only help you create a financial plan, but will also help you execute it properly and make sure that key details aren’t overlooked. For example, immediately following your divorce, it’s important to update your beneficiary forms for your retirement accounts and life insurance policies. (Remember, beneficiary forms always supersede your will, so it’s important to keep them up to date following a change in your marital status.) Other important documents, such as living trusts and medical directives, need to be signed. Trust accounts, if any, need to be properly funded. Finally, if you’re considering or currently involved in a second marriage, it’s important to carefully structure assets to protect property that needs to be maintained separately. By establishing a clear and open understanding of asset ownership, you’ll have a stronger foundation of trust and understanding for your new relationship.
Empowering Yourself for Success
While divorce can be a daunting process, you don’t have to handle it alone. At every stage of a divorce, it’s important to rely on your support network of friends, family members and people who have been through similar experiences. Get professional guidance and advice to sort out any legal or financial questions you may have and avoid making decisions in haste. If you’re feeling pressured to make decisions on the fly, give yourself a cooling off period. Take a few days, weeks or even months if needed to evaluate your options. And finally, make sure that all of your questions are answered to your satisfaction before signing any papers or documents. By taking things one step at a time, you can empower yourself for success and make the most of your future.
Sidebar: Planning for Property Taxes and Beyond
In a recent divorce settlement, Robert received a house valued at $2.5 million and $30,000 per month for five years from his ex-wife. In Marin County, where the median property tax is 1%, his annual property tax is approximately $25,000 a year. While Robert is pleased with his settlement, he is also concerned about being able to pay his future property taxes and other living expenses after his alimony payments cease. He meets with his wealth manager, who helps create a long-term financial plan. As part of his strategy, he plans to begin his consulting work again to supplement his income when his children are old enough to attend school full-time. In addition, he is setting aside extra savings each month to help plan for a smooth transition when his alimony payments expire.
About the Author: Bruce Raabe is the Managing Member at Collins & Company, a wealth management firm located in Larkspur, CA. He specializes in creating comprehensive wealth management plans that help his clients navigate the financial uncertainties that often accompany significant life events, including marriage, divorce and retirement.
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