A Woman’s Guide to Financially Survive a Divorce
The decision to divorce is one of the most significant decisions you will make in your lifetime. It has profound implications. It can affect your entire family (kids, parents, siblings, etc.) your friends, and where you live. It may affect your physical health, your mental health, and your career. It can also affect you financially.
You’ll want to seek advice and support from a variety of experts who can support you during this challenging transition. You should work with a family law attorney to understand and address the legal aspects of divorce. You might want to consult with a family counselor/therapist to work through the personal and family issues associated with divorce. You may wish to seek the advice of a financial planner/advisor (Certified Financial Planner™ Chartered Financial Consultant® or Certified Divorce Financial Analyst®) who can help you navigate the many financial ramifications of divorce.
We are not attorneys and this guide is not designed to provide legal advice. We are also not licensed therapists, and, therefore, we are not trained to help you with the personal issues you will face. We are financial planners, and we hold the CFP®, ChFC®, and CDFA® credentials. We have decades of experience providing financial guidance and advice to women who are contemplating, going through, newly emerging from, and/or living long after divorce. This guide is designed to help you prepare for, negotiate, avoid the mistakes of, and live beyond divorce.
Most of the biggest decisions we make in life have financial implications. Deciding where to go to college. Deciding on a career. Deciding where to live. Deciding whether or not to have children. All of these decisions impact you financially. However, none of them affects you as much as a divorce.
Because women often delegate financial responsibility to their spouses, they are often not as familiar with their household finances. This means that they may not have thought about the financial impact of divorce on women. So, let’s consider how you can prepare financially for divorce.
A good place to start is with spending. What are you spending to live currently? What will change if you divorce? Presumably, either you or your spouse will move to a different living environment. If you remain in your current home, will you be able to pay the associated costs (mortgage/rent, taxes, insurance, utilities, maintenance)? If you decide to move, what are those costs likely to be?
What about health insurance? Are you on a plan that will continue after divorce? If not, how will you obtain coverage and what will it cost? Do you need life insurance? If so, how much and what kind and what will it cost?
Do you expect to receive alimony from your ex-spouse? How much and for how long? If you have children, what about child support? How much child support and for how long? What about paying for your children’s education (e.g. private school, college, grad school)?
What financial assets (e.g. home, property, pensions, retirement accounts, investments, etc.) do you and your spouse own? What are the tax characteristics of these assets? How are they likely to be divided in a divorce?
If you have been out of the workforce, do you plan to return to work? Is returning to work an imperative? Do you have current skills, credentials, knowledge, and experience? If not, will you need to go back to school? How much would additional schooling or training cost? Once you are back at work, how much do you expect to earn?
As you might imagine, you will probably need advice as you think through these questions and prepare financially for divorce. You should talk to a family law attorney about all of the legal aspects of divorce. You should consult with a financial advisor (Certified Financial Planner™, Chartered Financial Consultant®, or Certified Divorce Financial Analyst®) about the financial aspects.
Divorce can be a very difficult experience. You can minimize the financial impact by preparing and planning ahead..
If you have decided to divorce your spouse, there are several ways in which you can approach the process. If you and your spouse are on good terms and your situation can be simple (e.g., no kids, limited assets, no legal complexity, and good collaborative spirit with your partner), you might be able to “do it yourself.” You would follow the laws in your county and state and complete the documents necessary to dissolve your marriage.
If your situation is more complex (kids, significant assets, legal complexity) and you and your spouse are on good terms as you discuss ending your marriage, then you might consider a collaborative approach. This process involves working with a team to negotiate an agreement to end your marriage. The team typically includes attorneys (one for you and one for your spouse), a divorce coach, a financial specialist (Certified Divorce Financial Analyst®), and, if you have children, a child specialist. The group will work together to achieve a dissolution agreement that will avoid litigation in court.
If you and your spouse are in dialogue, but struggling to come to terms on your divorce, you should consider mediation. This is true regardless of the complexity of your situation. In mediation, you and your spouse hire an attorney (or you each hire an attorney) to help you sort through and resolve the areas of conflict as you pursue the end of your marriage. The goal of mediation is to reach an agreement about the dissolution without going to court.
If you and your spouse are in unhealthy conflict and none of the other methods will work, then you will be forced to pursue a litigated dissolution. This is the least desirable approach, because it is contentious, unpleasant, public, and expensive.
What are the financial issues that are negotiated in the dissolution of a marriage? Alimony (i.e. payments by one spouse to the other for the support and maintenance of the other spouse) and child support (i.e. payments by one spouse to the other to care for children and keep them in the same general standard of living they experienced before the divorce) are the most common.
If you and your spouse have accumulated assets, you will need to decide how to divide them between the two of you. Your home is probably the most obvious shared asset. Who will live in it? Will it be sold? Is there a mortgage? How will you divide the value of it?
What about retirement assets? Do either of you have pensions, employer-sponsored retirement accounts (e.g. 401(k), 403(b), deferred compensation), IRAs, and Roth IRAs? What about employer stock and stock options? Remember that retirement assets are typically tax-deferred (i.e. the income tax due is deferred until distributed in retirement). That means that they are worth less than the stated value, because taxes will eventually be deducted from them.
How about other assets such as investment accounts, insurance contracts (cash value life insurance, annuities) loans to others, coin collections, intellectual property (patents, copyrights, trademarks), businesses, vehicles (cars, trucks, RVs, boats, etc.), timeshares, rental property, timeshares, raw land, collections, antiques, artwork, and household goods and furnishings?
Are there debts to others (e.g. credit cards, home equity loans, personal loans, unpaid taxes)?
How do you value your assets? In some cases, there is a ready market that provides current values (i.e. stock in a publicly traded company). However, in many cases, you will need a professional appraisal of the asset. You may need multiple appraisals, if you and your spouse cannot agree on an initial appraisal.
Anything of any significant value will become part of the settlement process. Yes, there may be prior agreements between you and your spouse that segregate certain assets, but you will still need to come to an agreement about who gets what. Also, state law (e.g. community property law) may determine how assets are divided.
Your objective in the financial part of the settlement process should be to identify all assets (and liabilities), obtain proper fair market value for them and determine how you would like them divided between you and your spouse. You may need the help of an attorney, tax professional, a financial planner (Certified Financial Planner™, Chartered Financial Consultant®, or Certified Divorce Financial Analyst®), and appraiser(s).
If you are just emerging from divorce, you are probably trying to reassemble your life. You may have just travelled through one of the darkest chapters in your life. But you made it to the other side. Now let’s look at how you can thrive financially after divorce.
The place to start to rebuild your financial life is, perhaps curiously, to take care of yourself. Focus on your health. Make sure your diet is nutritious. Exercise several times each week. Get plenty of sleep (7- hours). Keep alcohol consumption to a minimum. Don’t smoke and avoid recreational drugs and other dangerous behavior. Surround yourself with positive, uplifting people. Practice your religion or meditate or do whatever you do to nurture your inner self.
Once you are feeling better about yourself, you can start thinking about your financial life. Start with an assessment. What are your assets and liabilities? These make up your balance sheet and the difference between the two of them is your net worth. What are your sources of income? Perhaps you are working or soon will be working. How much will you earn? Are you receiving alimony? How much and for how long? What about child support? Will you have other income from, say, rental property?
Now that you know how much income you will have coming in, let’s consider your expenses. Do you know what you were spending before you got divorced? How will that change? Did you move? What are your fixed costs for housing (mortgage/rent, tax), utilities, insurances (personal, property, and casualty), cell phone, cable TV and internet, gym membership, groceries, transportation, entertainment, etc.? What about your variable expenses for vacations, home repair and maintenance (e.g. appliances), vehicle replacement? The more precise you are in identifying and projecting your expenses, the more confident you will be about your financial future.
Before we go any further, let’s step back and acknowledge that you should be saving for any large future expenditures that are not in your core living expenses. That means saving for vacations, replacement vehicles, your children’s education, and, above all, retirement. The best way to organize your finances is to save first and spend second. Most people spend first and save second, if there is anything left to save and too often there isn’t.
What do you do if your income is not big enough to save the way you need to and spend the way you want to? Well, you will have to make some tough decisions. What’s most important to you? Do you need to live in the house you shared with your ex-spouse? Do you need to take as many vacations? Can you trim your cable TV package? Could you change jobs and earn more? What about taking on a second part-time job? Try to find ways to reduce your expenses and/or increase your income, so that you can save what you need to save and spend what you want to spend, but saving is your priority so don’t compromise it.
In the wake of a divorce, there are some other tasks you need to take in order to be financially secure. You should change the beneficiary designations on your retirement accounts, your insurance policies and your “transfer-on-death” accounts. You should check in with the Social Security Administration and clarify your benefits. If you were married for ten or more years, you will qualify for benefits based on your ex-spouse’s record and those benefits may be larger than your own. (You receive the larger of the two.) If there are mistakes in your earnings record, you can correct them. You should establish an emergency fund that contains enough cash to pay for a large, unexpected expense or pay your basic, fixed living expenses for 3-6 months if you become unemployed for some reason. You should update your estate plan (will, durable power of attorney, and health directive).
As you might imagine, to work through and accomplish these financial tasks, you may need assistance from a financial advisor (Certified Financial Planner™, Chartered Financial Consultant®, or Certified Divorce Financial Analyst®), insurance agents, tax professional, and estate planning attorney.
The key to thriving financially after divorce is developing a sound plan and following it.
There are a lot of issues to consider as you go through a divorce. They fall into categories: legal, financial, tax, and investment. Let’s consider the issues and who can help you navigate them.
Unless you plan to execute your own divorce (i.e. do-it-yourself) in your legal jurisdiction (state and county), you will need to hire an attorney who can walk you through the process of dissolving your marriage. While most attorneys are capable of guiding you, we suggest you work with a family law attorney who focuses on divorce. You can find family law attorneys by searching on your state bar’s website, asking other professionals for a referral, or doing a simple internet search. You should interview 2-3 and select the person who is most qualified and with whom you have the best personal rapport.
If you are likely to receive alimony from your ex-spouse, your divorce attorney will help you negotiate an amount and a payment period that is fair. If you have children and expect to receive child support, your attorney will also negotiate those payments.
Divorce results in a tangle of financial issues. What are the marital assets, what are they worth and how will they be divided? How much income will you have after your divorce? Will that be enough to support you? What will you do for insurance? How will you save for retirement? What will be your Social Security benefits? What happens if your ex dies and your alimony and child support end?
There are various financial advisors who can help you with the different financial issues you will encounter in your divorce. A financial advisor can help you with many aspects of personal finance (budgeting, insurance, taxes, estate planning, investments, education funding, retirement planning). Look for a fee only planner who does not sell financial products and earn commissions. The Certified Financial Planner™ and Chartered Financial Consultant® credentials are the most respected credentials held by financial planners. If you feel you need particular expertise in the area of divorce financial planning, look for a Certified Divorce Financial Analyst®. You can search for a CFP® at the CFP Board website and a CDFA® on the Institute for Divorce Financial Analysts website. The American College awards the ChFC® designation, but there is no way to directly search for one on its website.
If you have difficult-to-value assets, you should hire an appraiser. The American Society of Appraisers confers four appraisal credentials related to the subject in need of appraising. There is a “Find an appraiser” tool on its website. If you are trying to value a business, consider hiring an accountant with the Accredited Business Valuation (ABV) credential. There is a credential directory tool on the AICPA website.
If you need tax-specific advice, work with a Certified Public Accountant (CPA) or an Enrolled Agent (EA). The state society of Certified Public Accountants will often have a tool on its website that allows a consumer to find a CPA. You can search for an enrolled agent on the National Association of Enrolled Agents website.
What about insurance? If you need help with personal insurance including life insurance, disability insurance, annuities and long term care insurance, consider working with a Chartered Life Underwriter (CLU®). The American College bestows the CLU credential, but there is no search tool on its website to find a CLU. If you need help with health insurance, consider working with a Chartered Healthcare Consultant® (ChHC®), Registered Health Underwriter (RHU®) or Registered Employee Benefits Consultant (REBC®). All of these credentials are administered by the National Association of Health Underwriters, and there is a “find an agent” tool on its website.
If you need assistance with your investments, there are two credentials for which you should look. The Certified Financial Planner™ (CFP®) and the Chartered Financial Analyst (CFA) designations. The latter can be found on the CFA Institute website on their member directory.
You will need to update your estate plan. While most attorneys are capable of doing this, consider working with an estate planning attorney. These attorneys work more narrowly on estate planning matters. As with family law attorneys, you can find an estate planning attorney on your state bar’s website.
For all of these professionals, you can, of course, ask for referrals from other friends, family members, and other professionals you know or conduct a search on the internet. It is always wise to interview 2-3 experts before selecting one to serve you.
Divorce is a complex process with many and varied financial consequences. Surround yourself with experts to avoid pitfalls and achieve the very best outcomes.