If you’ve ever gone through a divorce, as many of us have, you know that it’s an incredibly difficult experience. What’s arguably been the most important relationship in your life is about to end, or has just ended, and you’re reeling. So many things have changed. You may have moved out, and found your own place. If you didn’t, your partner likely has, and your home feels strange. If you have kids, they’re caught in the maelstrom and need lots of support. Your extended family – parents, sibling, etc – have had different reactions to the news – some supportive, others perhaps not so much. The same is true of your friends; some have rallied to your side; others haven’t really been there for you. Even the family pet(s) may have been pulled into the storm – you’re arguing over who’ll keep Lucy, the labrador retriever. However, though you may not know it, the biggest challenge you face is the financial impact of divorce.
Housing: Do I stay or do I go? Do I own or do I rent?
Probably the biggest and most obvious question you’re facing is where to live. If you’ve been in your current home for any length of time, you may be attached to it, because it provides comfort and stability during a tumultuous time. If you have kids, you’ll likely be even more motivated to stay in the place they consider “home”.
But you should ask yourself if it’s prudent to remain in your home from both a practical and an economic perspective. Do you need as much space, now that you and your spouse will be living separately? Can you actually afford to live in the house, and also pay for all of the other expenses in your life? If you keep the house, you’ll be responsible for the mortgage payment, property taxes, homeowner’s insurance, all of the utilities, and ongoing maintenance (e.g. replacing appliances, painting, the roof, windows, etc.). These costs can obviously add up fast, and they may amount to more than you think.
You should ask yourself if owning a home even makes sense. For the better part of a century, the American government has promoted home ownership as the foundation of the “American Dream”. But is it? Home prices have risen dramatically over the past several decades, particularly on the coasts. If you combine this with the fact that real incomes have mostly been stagnant over the same period, you should consider whether you may be better off renting. You might find this tool from the New York Times helpful, as you consider the trade-offs. The cost of housing is probably the biggest and most immediate financial impact of divorce.
Insurance: What kind? How much? How long?
As you come out of your divorce, one of the first things you’ll need to do is figure out how you are going to get health insurance for you and your children. Is your ex-spouse going to cover the kids on his employer-provided plan? If you were on your spouse’s employer-sponsored health plan before you divorced, you’ll have the opportunity to continue that coverage under COBRA for as long as 36 months. The problem with health insurance under COBRA is that it can be very expensive, because it’s not subsidized by an employer and lasts only three years. It always makes sense to explore other options in the private health insurance market. If you live in Oregon, you might be eligible for tax credits for plans available through the health insurance marketplace. If your income is lower than $1,396 a month, you might qualify under the Oregon Health Plan and pay no premium. California residents can buy coverage on the health insurance exchange, or in the private market.
Health insurance isn’t the only insurance that needs your attention, though. You need to consider life insurance, as well. You should make sure that there is enough insurance on your ex-spouse to replace spousal support and child support payments, should he die prematurely. The court may require your spouse to carry life insurance to protect these payments. Make sure you own the policy. If your ex-spouse stops paying the premiums, you can intervene before the policy lapses. You should also consider life insurance on yourself, particularly if you have dependent children.
If you’re working or returning to work, remember that your income should be insured. You can do this through disability insurance, which can be obtained through your employer and/or in the private insurance market. If you become sick or hurt and unable to work, you want your income to continue.
Insurance can be confusing, and buying it can be expensive. We recommend working with an insurance specialist who can help you understand what type(s) of insurance you need, how much coverage you need and how long you’ll need it.
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.
Kids: How do I insulate them?
If you have kids, your divorce will likely be very hard on them. It may be smart to get some professional counseling help to guide your kids through this challenging time in their lives. You’ll want to protect them, and give them as much stability as possible. We often see parents use money as a tool to help their kids feel better. They’ll buy them things (phones, video games, televisions, sports equipment, etc.) to try to help take away the sting of a broken family. Unfortunately, this usually only provides temporary comfort.
A better strategy is to first figure out what your income is, and then plan your spending. Will you receive alimony? How about child support? Will you work? Are there other sources of income (e.g. from rental property or a family business)? Add it all up. How much of it do you need to set aside for your retirement? How much for your kids’ education? What’s left for spending today on you and the kids?
Unfortunately, most people approach this the other way around. They spend according to their needs and wants, and then save what’s left over, if anything. You definitely want to take care of your kids. The best way to do this is develop a plan that will minimize the financial impact of the divorce on them.
Income: How do I support myself?
If you haven’t been working before your divorce, you’ll need to decide if you need to return to work. Will other sources of income be enough to allow you to take care of yourself and your kids without going back to work? Yes, you may be able to cover your expenses for a few years, perhaps even longer. But what happens when child support ends? What happens if your ex decides to retire and asks the court to reduce or eliminate your alimony payments? What source of income will you rely on when you’re older and no longer working? Will your savings and Social Security be enough?
It can be challenging to re-enter the job market after time off to raise your kids and/or support a spouse. Your job-specific knowledge may be out-of-date, your skills a bit rusty and your daily routine out of sync with a typical work schedule. You may need to go back to school, upgrade your tech skills, and even refresh your wardrobe. But, by going back to work, you can significantly improve your long-term financial security, which is one of the biggest challenges facing women after divorce.
Retirement: How will I retire?
The biggest financial impact of divorce on women relates to retirement. As we’ve discussed, if you left the workforce to support your ex-spouse and/or raise your children, you made many sacrifices. You stopped earning money, some of which could’ve been saved for retirement. Your work history was interrupted. Your Social Security earnings record, which is used to calculate retirement benefits, stalled. Your work-related knowledge may be out-of-date, and your skills may be a bit stale. So, re-entering the workforce may be challenging. But your long-term financial security may require it.
Another challenge is longevity. Women live longer than men. You’ll need to plan to live to at least age 80, and probably a good bit longer. At some point, you may also need help caring for yourself. So, think about who’ll care for you later in life, and how you’ll pay for it.
In your divorce settlement, you may have received some retirement benefits (e.g. a 401(k) account, an IRA, part of a pension plan, etc). It will be very important to protect this nest egg, as it will be critical for your retirement. You’ll also likely qualify for Social Security benefits. If you were married for at least 10 years and haven’t remarried, you’ll be entitled to claim a benefit based on your earnings history or your ex’s, whichever is greater.
So, you’ll need to put together a retirement plan that includes returning to work, saving in retirement accounts, and maximizing your Social Security benefits.
Divorce is often a traumatic experience, and the financial impact is significant. However, with proper planning, you can navigate the challenges and enjoy the rest of your life.