The topic of divorce is a hotbed for great comedy – movies, stand-up routines, one-liners, you name it. What’s typically at the root of any post-marriage jab is the issue of money. Case in point, consider these classic lines:
“It’s tough. After five years of marriage, it’s difficult to lose the one with the good credit rating.” – Rich Voss
“If you hire a divorce lawyer today, there is a good chance you will hire a bankruptcy lawyer within two or three years.” – Gene Meyer
“In Palm Springs, they think homelessness is caused by bad divorce lawyers.” – Garry Trudeau
Movie fans, have you seen Wedding Crashers? It depicts a divorce mediation and takes these jokes up a notch. In the opening scene, two mediators are trying to resolve a hotly contested divorce and are trying to reach an agreement on (wait for it) who gets the SkyMiles.
All joking aside, divorce is an emotional process. It is also a financial process. Full stop.
No matter how much wealth you have accumulated, divorce will likely leave you with less income and fewer assets than you previously enjoyed. This is true even in the most amicable of dissolutions. After all, you’re potentially going from a dual- to single-income lifestyle. And that can sting.
According to a 2012 report from the US Government Accountability Office, after divorce women on average suffer a 41% drop in income, and men typically take a 23% hit.
As you can see, it pays to take the right steps to ensure your financial future and secure your retirement goals if you ever find yourself undoing “I do.”
Depending on your age at the time of the divorce, the steps you’ll want to consider look different. Think, for example, of a relatively short marriage with few assets versus a decade-plus union where you and your spouse bought a home and contributed to retirement savings plans.
For younger couples who decide to split, each likely has more time to make up for lost assets and income. As for older couples, both husband and wife will want to be more conservative in how they manage their separated assets, yet still allow for growth. In both of these situations, income investing -could prove beneficial.
Divorce doesn’t always spell disaster when it comes to unwinding marital assets. It just takes some time, careful consideration and, ideally, the guidance of a trusted financial professional. In the end, you may find yourself in a much better place financially than you originally thought.
Here are a handful of financial tips for anyone dealing with divorce.
1. Get a firm handle on your cash flow. It’s not pleasant to go from a household with potentially two income producers down to one. But, when you sit down with pen and paper and outline exactly what all your post-marriage income streams will be (employment, Social Security, investment income, child support, etc.), you can start planning how to best use your cash.
Once you have a grip on what’s coming in, it’s time to look at what’s going out, i.e., your monthly expenses. Here is the hard part, because it is possible that your lifestyle will need some adjusting. But, maybe not. The only way to know is to chart what you spend each month and compare that number with your income. Still have a surplus? Great! Running a little tight or at a deficit? It may be time to trim some fat. Which brings me to my next point.
2. Create a realistic budget. Keep that pen and paper handy – our next step is making a budget. We’re looking to make an honest assessment and create something you can live by.
This may be easier said than done. Depending on your unique circumstances, you may need to make small changes (like taking a second look at that premium cable package) or big ones (like reevaluating whether you still need that big house). But more than likely, you will need to trim some budget fat and look at downsizing your lifestyle.
Ask yourself these two questions: 1) Where can I tighten my spending belt, and 2) How can I maximize my income and resources? It doesn’t have to be a painful exercise; get creative with your thinking and planning. Maybe downsizing to a cute bungalow or a city condo would be the perfect change. Or, perhaps you could rent out a room or two on Airbnb and pull in some extra cash. The sky is the limit!
3. What about Social Security (SS) benefits? If you’re of the age where you can start taking SS benefits, you may want to consider doing so. Perhaps you had decided to postpone tapping this resource while you were married. Now, it may make sense to go ahead and claim that monthly check. Why? Because this supplemental income could take some pressure off your investment accounts, allowing them to grow more.
4. Take a fresh look at your investment portfolio. Ask yourself if your investment goals still make sense for your current situation. If, for instance, you were set up with growth as your biggest goal, now may be the time for a change. In the best-case scenario, you want a strategy that maximizes yield and income (read as cash) on a monthly basis, while still allowing for growth over the long term. When it comes to your IRA or 401(k) accounts, try to max out your contributions. And, whatever you do, try not to pay for the divorce out of your retirement savings.
5. One last piece of paperwork. If your ex is the beneficiary of your insurance, retirement and other accounts, you may want to change that. This is an often-overlooked area of the divorce process, and it can make for messy litigation if not addressed.
So, there we have it. Follow this simple checklist to help you transition to the single life with financial flying colors.