When you get married you do so because you love the person you are with and want to start a life with them. When you get divorced it’s because at some point things turned south and you realized that this is no longer the person you want to spend the rest of your life with. The financial implications of going through a divorce can be more costly than you may have ever imagined and now you are trying to figure out how to go from a “we” to a “me” situation.
In retirement planning divorce can be one of the most detrimental events that take place. You have spent years with the person you were married too and now everything you worked to build with that person no longer exists. It is emotionally draining and frustrating, but at some point you have to start picking up the pieces and getting back on track.
You have to evaluate what is most important to you and what you want your life to look like without anyone your ex-spouse in it. You have to take charge of your finances and evaluate if you are on track for accomplishing your goals and not someone else’s. In this post we will be evaluating two different stages you may be at in your divorce: the beginning process of filing a divorce and wrapping up a divorce.
If you are in the early stage of filing a divorce it is important to understand how each settlement option impacts you not only in the short-term, but also in the long-term. Chances are you have sat down with your attorney and they have put together what is known as a financial affidavit. Think of this document as your household balance sheet. It should containing everything of value in your marriage from all of your savings to all of your debts (and much more in between).
The financial affidavit is a very important document and will impact the separation of your assets later, so make sure it is accurate! When it comes time to evaluate who gets what, it is important to know the financial impact it will have on you in the short and long-term. Working with a financial planner can add an incredible amount of value to your decision when it comes to understanding the tradeoffs between each option. In this phase you can have your planner model each option so you see exactly how each one impacts you.
For individuals wrapping up a divorce, the settlement option has been agreed upon and you are now splitting the assets. Take some time to make sure that every account being separated is transferred to a “like” account. For instance, if you have a QDRO (qualified domestic relation order) that tells your spouse that half of their retirement account is to be transferred to you then you should open a traditional IRA for those funds to be sent to. If for instance these assets are simply transferred to your checking account then you will be required to pay taxes on them as if it was earned income. So remember, when transferring assets always go “like” to “like” unless you have a very good reason not to.
Towards the end of the divorce you may be asking yourself what now? Again if you are working with a financial planner, take some time to sit down with them so they can show you what needs to be done in order for you to regain control of your finances. Understand that your goals may change, you may have to return to work in order to fund you future retirement, or you may have to make certain sacrifices today to ensure that comfortable lifestyle in the future. Having your planner update your financial plan will give you a roadmap to help you better accomplish your goals and keep you on track.
It’s important that you have a very clear understanding of your current financial picture. Take some time to map out all the incoming sources of income you have including: employment income, child support and alimony (if applicable). Once you understand where all of your income is coming from, make sure you understand how long it is expected to last. Keep in mind that child support will only be available for a certain period of time, and is there for you to help in raising your children. Alimony on the other hand is not tied to the age of your children, but rather a predetermined period to either help you retrain yourself to be more employable or some fixed period of time.
Once you understand your sources of income and how long the will last, you need to figure out how you will be financially once the child support or alimony run out. Take time in these early years to either save or go back to school. If you have been a stay at home parent for several years then you may need to go back to school to become employable again. Or if you are employable, you may need to rely on the extra income for a period of time until you are able to secure a position in your field.
Getting through a divorce is a complicated and emotional roller-coaster that isn’t a short process by any means. Empower yourself to take control of the situation today and decide that it will not be the end. You will still accomplish your goals and live the life you dream about, you just have to plan for it and take action.