Going through a divorce is among life’s most difficult experiences. There are emotional, social, psychological, economic, and even physical consequences. Because the process can be so difficult, you might overlook issues that could impact your financial security and independence. We’ve highlighted below some of the most important mistakes women make in divorce.
Keeping the Family Home
Your home provides comfort and security. It’s a very natural reaction to want to stay in your home when faced with the loss, adversity, and disruption that divorce brings.
We often find that one spouse wants to remain in the home, and it’s often the wife. She usually has several reasons for this, and one is keeping the children in their family home in an effort to minimize the disorientation they’re experiencing.
Unfortunately, it’s often not economically possible to do so. If you were able to afford the house before your divorce, it’s not a given that you’ll be able to after the fact.
We highly recommend that you assess your post-divorce financial situation prior to reaching a settlement. Housing is usually your biggest expense before and after divorcing. Can you really afford to live on your own in the house you shared? It may be possible in the short-term, but what about long-term? Will remaining in the home prevent you from having a comfortable lifestyle, paying off debt, funding education for your children, or saving for retirement?
Neglecting Tax Considerations in Your Settlement
When you’re negotiating your settlement, you must include taxes during the process. It’s easy to forget that not all assets are alike, once taxes are considered.
A 401(k) with $800,000 is not equivalent to a home with a value of $1 million and an outstanding mortgage of $200,000. A brokerage account with $250,000 and a cost basis of $200,000 is not equivalent to a life insurance contract with $250,000 in cash value. A pension that provides an income of $3,500 per month is not equivalent to rental property income of $3,500.
Someone earning $250,000 a year is in a different tax situation than someone earning little or no income. Consequently, the way you should look at the assets in your settlement may differ from the way your ex-spouse will.
You should consult with a tax professional who can help you evaluate your assets on a tax-equivalent basis. Considering taxes and consulting a professional can help you avoid some of the common mistakes women make in divorce.
Not Returning to Work
If you’ve been out of the workforce for some time during your marriage, a divorce may spur you to return to work. For example, if you were at home raising children during your married years, you may at some point want to work again, so that you can generate additional income, make new social connections, and be engaged and stimulated.
Unfortunately, it’s often very challenging for someone who hasn’t been working for many years to re-enter the workforce. The skills and knowledge required to perform many jobs change over time. If you’ve been out of the workforce for many years, you may need to obtain new education and training. There is also, unfortunately, age discrimination in our economy, which may prevent you from being hired for positions for which you may otherwise be qualified.
We advise clients to have conservative expectations about their ability to obtain a new job, and about the income that the job will pay. We’ve also observed clients who, while otherwise qualified to work, have chosen to not work even though they would be much more secure financially if they did work. So, it’s important not to plan on income that may never materialize.
Overspending
People who have been married often become accustomed to a lifestyle that’s only possible because they’re married. After a divorce, the economics for both spouses can change dramatically. You’re now splitting resources (income and assets) and duplicating expenses you once shared (housing, utilities, insurance, vacations, etc.). It’s a double negative.
There’s often a reluctance to change spending behavior, too, because experiencing even more change is undesirable, and because it may not be obvious that a change is necessary.
The harsh reality is that you’ll probably need to reduce your spending after a divorce, to avoid incurring debt, and to ensure that you’ll have enough saved to fund retirement. The sooner you realize this and make the necessary adjustments, the more likely that you’ll enjoy long-term financial security. Taking control of your finances is a crucial aspect of avoiding the common mistakes women make in divorce.
Contact us today to learn how a Certified Divorce Financial Analyst® can help guide you and answer your financial questions before, during, and post-divorce.
Overly Conservative Investments
Investments are typically split between the spouses as part of a divorce settlement. Both spouses should then determine an appropriate investment approach for the future.
Generally, one spouse took primary responsibility for the couple’s investments. That spouse made (good or bad) investment decisions, which affected both of them. If your spouse was the one that took primary responsibility during your marriage, you’ll need to quickly get familiar with your accounts and investments after your divorce is finalized.
Women tend to be more conservative investors than men. They’ll often adopt a very conservative mix of investments (or “asset allocation”) after divorce because of a desire to preserve their nest egg. The problem is that a focus on preservation of principal will result in very little growth of the portfolio. And, for your financial security you’ll probably need to grow your investments at some reasonable rate that’s greater than the rate of inflation.
Prioritizing College Over Retirement
Parents typically want to help their children obtain a college education. Couples who are married often agree to pay for some portion or all of the educational costs for their kids.
However, after a divorce, it’s often much more difficult for parents to support their own independent lives and pay for college for their children. Unfortunately, many of us commit dollars to paying for college that are then not available for our own long-term financial security.
Both spouses need to determine during the settlement process their ability to fund college for their children after the divorce. They shouldn’t obligate themselves to paying for college unless they can meet their own needs, both current and future.
Social Security
Most people don’t consider, much less understand, the benefits they’ll receive from Social Security until they reach an age at which they qualify for them. Social Security benefits are a very significant resource for most people, and, consequently, they should be considered carefully so that you may avoid the common mistakes women make in divorce.
We’ve seen numerous situations in which a divorced person didn’t understand the benefits that they’ll receive based on their own work history and, potentially, on the work history of an ex-spouse.
We recommend consulting with an advisor who’s well-versed in the nuances of Social Security. Unfortunately, you can’t assume that the information provided by the local Social Security Administration office will be accurate or complete. An independent expert can equip you with the information (and supporting documentation) necessary to apply for benefits.
Estate Planning
Many people don’t have a written estate plan. In Oregon, everyone (single, married, or divorced) should have a will, a durable power of attorney for finances and an advance health care directive. People with more complex circumstances should also consider a trust.
After your divorce, you’ll want to change the beneficiary designations on your retirement accounts and life insurance contracts. If you have minor children, you’ll need to consider guardian arrangements in the event of your death.
Divorce is very emotionally draining. So, there’s a natural tendency to avoid other emotionally taxing subjects, like estate planning. However, the peace of mind that comes from knowing you’ve properly planned for the future will outweigh the discomfort and help you avoid the common mistakes women make in divorce.