Few life events can be more grueling than separation and divorce. Emotionally, socially, legally, and financially, it is hard for everyone involved, no matter who initiated the process.
Divorce can be especially tough on women. Especially for those who have been married 20 years or longer—participants in what is often called “gray divorce”—the financial implications can be especially difficult. Recent statistics indicate that in the year following a divorce, women’s income may drop as much as 40%, while men’s income may fall as much as 23%.
Main Financial Considerations
For anyone going through this trying time, however, some key financial considerations should be brought to the table as soon as possible. While many have a tough time getting past the emotional riptides that divorce can engender, there are four key matters that those going through a divorce must face.
1. Dividing investments and other property. Legal methodologies for answering this question vary from state to state, but one foundational principle is that the marital property must be divided equitably and fairly (and this does not always mean it must be divided equally). Especially with divorces occurring in midlife, one or both parties typically have established careers and made investments, and it is very important for everyone to be calm, clear-eyed, and strategic as they navigate the division of the estate. Much depends on the nature of the property: divvying up stocks, bonds, and other marketable securities can be fairly straightforward, once the initial decision is made about what constitutes a fair distribution. But real property, stock options, and collectibles can present more complex problems. Dividing a business that has been co-owned by the spouses can raise a number of thorny questions, also. Having the right financial and legal team members is vital.
2. Selling or keeping the home. This is an area where emotions can run especially high, especially when you’ve raised your children and, in some cases, even welcomed grandchildren into the marital home. But it is also an asset, and both parties need to do their best to view it as such. It rarely makes sense for one partner or the other, both now on a single income, to try and retain the marital residence. If the decision is made to sell, it is urgent to obtain a fair appraisal that both parties can agree on. When this is not possible, each party may wish to order an appraisal, and the two can be averaged to arrive at a mutually agreeable selling price.
3. Retirement accounts, pensions, and similar assets. If both parties have established careers that include defined-benefit plans (pensions), 401Ks, IRAs, and other retirement plans, this may be much easier. But in many cases, women leave the workforce for a period of time in order to care for children or aging parents. In fact, the average woman will spend 12 years out of the workforce because of caregiving duties, and even if she is currently working, she may have fallen behind in both earning power and accumulated assets for retirement, due to years out of the job market. If a portion of one party’s retirement accounts is to be handed over to the other, a qualified domestic relations order (QDRO) will be required. Getting a QDRO is typically neither quick nor inexpensive, so understanding how the costs of obtaining it will be distributed is key.
4. Adequate monthly income. If both parties have an established career, this may be less of a question, although it will be important for both to set up workable budgets and to ensure that monthly cash flow is adequate to sustain it. In cases where spousal support may be needed, however, it is vital for the party receiving support to work closely with their financial advisor, their attorney, and possibly their CPA to arrive at an accurate, justifiable request.
Making the Right Preparations
Both parties experiencing separation and divorce should prepare carefully for the process. Following are some important suggestions; following this advice can help to ensure that everyone involved is knowledgeable about their legal rights and about the financial resources that will be available to them as they begin a new chapter of their lives as single persons.
1. Get informed about community vs. separate property. Unless excluded by a pre-nuptial agreement, property acquired during the marriage is generally deemed to be owned by both spouses. Both participants need to know the extent of the household’s assets, including the value of the family home and other real estate, their former spouse’s retirement accounts (401Ks, IRAs, and pension plans), any businesses interests, and any other investment or banking accounts. Your legal counsel can help you access the necessary statements, contracts, and other documents, if your ex-spouse is reluctant to provide the information. You have both the need and the right to know this information in order to make sure that the eventual division of assets is fair and sufficient.
2. Update beneficiary designations. Every insurance policy, annuity, and retirement account contains a beneficiary designation that determines who receives the proceeds when the original owner dies (no matter what the will may state). If you own insurance or have other accounts with designated beneficiaries, it is likely that your ex-spouse is the beneficiary, and you will probably want to change this before the divorce is finalized.
3. Consider the tax consequences. Dividing up retirement accounts often involves liquidating assets and distributing them to one or both spouses. If a retirement account is distributed prior to age 59 ½, the distribution may be taxable unless the distribution is performed according to a qualified domestic relations order (QDRO) provided by the court. It’s also important, when dividing assets, to consider the different tax consequences attached to Roth IRAs and 401(k)s as opposed to traditional accounts. These differences should be considered in light of both recipients’ tax brackets, both currently and in the future.
4. Trust your team. A professional, certified financial advisor, working in tandem with your attorney, can help you anticipate problems and ask the right questions in order to ensure that you’ll have the financial resources you need as you begin your new phase of life. Make sure that your team can answer your legal and financial questions clearly, completely, and in terms that you understand. The more you know, the more you can be in control of your new future.
5. After the divorce. Your need for good advice doesn’t end when the divorce is finalized. Now that your circumstances have changed, your goals, resources, and priorities have shifted, also. Now is the time to meet with your trusted financial advisor, who can help you review where things stand and work with you to create a financial plan that can allow you to move forward with confidence. The more you know, the more power you have to take control and set your own course.
Mathis Wealth Management, as a fiduciary financial advisor, is obligated to provide guidance that places the client’s interests ahead of everything else. Especially during a divorce, having the right advice is crucial. If you or someone you know is facing the prospect of a divorce and needs help with answering key financial questions, we want the opportunity to assist.
