Since most people going through a divorce are not experienced with the process and are battling difficult emotions at the time, financial mistakes are common. Here are some of the pitfalls frequently encountered.
Not having enough cash on hand. With legal fees, court costs, a potential move and no longer sharing living expenses, divorce is costly. So it’s important to have reserves to avoid incurring debt.
Not securing an income. If you’re currently not working, try to get a job (ideally one with health insurance) – unless you expect to walk away with sufficient resources to support yourself the rest of your life. If you are working, look for ways to advance in your career or increase your income since many divorcing individuals find they need at least a 30 percent increase in income to maintain their present standard of living.
Not separating financially. You can’t control your financial destiny as long as you share a bank account, credit card, car loan or mortgage with your spouse. But if you don’t already have an individual credit card, make sure you can get one before closing your joint accounts. And update your will and change your beneficiary information on your insurance policies and retirement accounts.
Overlooking debts. If you live in one of the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), you’re liable for half of your spouse’s debt even if it’s not in your name. In the remaining 41 states, joint account holders on credit cards or loans are usually equally liable. So it’s important to close joint accounts and get a full credit report for you and your spouse.
Overlooking assets. Insist your spouse provide documents for their financial assets. Have your home and valuable possessions appraised. If you don’t know how much a spouse’s business makes, consider hiring a forensic accountant. If your spouse has a pension, it may be wise to have it valued as well.
Expecting an attorney to know and do everything. Many attorneys do not possess advanced financial training and expertise. An experienced financial divorce planner can provide a unique educated outlook toward the future that examines all the angles. What may seem equitable today may not look that way in years to come in light of inflation, cost of living adjustments, tax implications or other issues.
Not considering all the implications of proposed settlements. It’s easy to choose to keep the home without thoroughly evaluating whether you can afford all of the expenses that go along with it. Some assets have greater tax consequences than others. For example, stocks may incur capital gains taxes when sold, while profit from the sale of a primary residence is exempt up to $250,000 for a single individual.
Not dividing retirement accounts wisely. With different types of plans and various rules and options that apply to each, this is a complex area where a lot can be at stake. A qualified domestic relations order (QDRO) is required to transfer funds from a qualified plan such as a 401(k), profit sharing or defined benefit plan. If it’s possible, a buy-out or trade may work better for an annuity or nonqualified plan. For more information on this topic, see “Splitting Retirement Nest Eggs During Divorce” and “Divorce and Annuities.”
Not having a post-divorce plan. By the time we’ve hit middle age, many of us have developed spending habits and grown accustomed to a standard of living. But a late-life divorce not only divides existing assets, it reduces income – even if one spouse’s primary income is Social Security benefits. A financial advisor can help you determine what you need to retire comfortably and create strategies designed to help you get where you need to be.
Investing too conservatively or aggressively. Once the reality of having less assets while footing all of your living expenses sinks in, it may be tempting to either put too much money in high-risk investments for their growth potential or to choose overly safe investments with low returns.
An experienced financial advisor can help you make practical, objective decisions during a turbulent time, consider long-term implications of various settlement proposals and reduce the possibility of future financial regrets.
Securities America and its representatives do not provide tax or legal advice. Written by Securities America for distribution by William O’Donnell.