Financially Split: How to plan and invest in the wake of a divorce
By Caroline Galbraith, CFP | NBJ Column Submission | July 11, 2016
According to a New York Times data study, the divorce rate in the U.S. has been dropping since the 1980s. The common “statistic” that 50% of American marriages end in divorce has no basis in statistical fact. And while that can be considered good news, it does not change the reality that divorce is a distressing and often painful juncture for many couples.
Despite the very real emotional toll of divorce, there are vital considerations that must be addressed. For the purpose of this article, we will focus on some critical decisions that individuals need to make in terms of planning for his or her financial future as an unmarried adult.
Supporting Two Households
Whether you are living in a dual income household, or a single provider household, your cost of living can essentially double in the event of a divorce. For many couples, this can cause significant financial strain, and often times, the first line item to go is saving for retirement or other important future expenditures. In the short-term, it may be inevitable that you reduce the amount you are allocating to savings, but it is not a strategy that you can afford to implement in the long-term. If possible, identify a timeline that allows for retirement saving to continue once the independent households have been established and are stable.
Selling the family house, splitting bank accounts, and splitting retirement accounts can derail a solid financial plan. A financial plan is put in place so you can work towards a goal. Once the divorce is final, communication between households is essential to recalculate your savings and investment strategy. If the divorced party is unable to discuss this reevaluation amicably, they should lean on legal and financial advisors to establish a mutually beneficial plan. This is particularly important if your financial considerations are tied to children.
Incomes and Alimony
A dual income household could experience a lifestyle change. Alimony or spousal support will depend upon the comparative earning ability of each of the parties to a divorce. Paying support to the ex-spouse will become an added expense. Each person will then be obligated to run a household on the new designated income. Typically this added expense is firmly established by the court and therefore can be anticipated and budgeted on a monthly basis. While it may require lifestyle sacrifices this is a very real expense, and thus should be factored into your commitment to saving.
If you are covered under your spouse’s company health plan, a divorce may force you to obtain new coverage. COBRA (a federal law: ‘Consolidated Omnibus Budget Reconciliation Act) may be an option, but there are rules and restrictions to adhere to which takes careful planning before a divorce is finalized. If you are eligible for COBRA, it may be more expensive than other options, plus COBRA coverage from a former spouse ends within 36 months. Utilize your financial advisor in conjunction with an insurance professional to determine the best method of providing health insurance beyond COBRA.
Debt and Bills
Go through your expenses twice. Once to eliminate what you don’t need. Twice to determine if you can get better pricing on things you do need such as home or car insurance, a mortgage, internet and cable services, etc. If you are not the one who typically paid the bills in the marriage, you must learn how to stay on top of your expenses. Not paying your bills on time can lead to late-payment fees and charges. Late payments can also affect your credit score. If you need to borrow money in the future, it’s to your advantage to have a higher credit score.
Divorce can cause a great deal of financial stress. However, it should not necessarily mean that your options for getting back on track are limited. Look at every aspect of your portfolio and adjust according to the new dynamics of your relationship status.
Too often, the emotional toll of a divorce has far-reaching financial repercussions that could have been avoided with objective, strategic planning. Taking this step will help ensure that you have time to recover without the added concern of fiscal health.