Getting divorced can be a very emotional and difficult process. It can be stressful, painful and scary, even if you’re the one that decided to divorce.
Divorce also has significant financial consequences for both partners. For that reason, it’s critical that you start to work on rebuilding your financial life as soon as possible.
Let’s review five key steps you should take to secure your financial future as a divorced woman.
Build a New Budget
The foundation of your financial life after your divorce should be a detailed and objective assessment of your finances. Ideally, you should have a comprehensive financial/retirement plan made for you, that reflects your unique circumstances as an independent woman.
A key part of that plan is a cashflow projection, or budget.
When preparing your budget, be as accurate as you can. Some of your expenses – those we refer to as “core” living expenses – won’t change much from year to year, like the cost of housing, food, utilities, insurance, and clothing. Other expenses will be more flexible, and you’ll have more control over when you incur them. Think vacations, new cars, home upgrades, charitable gifts, and so on.
If you’re not retired yet, remember to include saving for retirement in your budget and your post-divorce financial planning. If you build your budget with retirement savings included, you’ll make your financial future that much more secure.
If you’re just recently divorced, don’t forget to include those one-time expenses that you’ll incur as a result of your divorce, like moving, furnishing a new home, etc.
When you’ve completed your budget, you may find that you don’t have enough income to maintain the lifestyle you had before your divorce.
If your budget is realistic, and there isn’t a lot of room to reduce your expenses, you’ll want to look at ways you can generate more income. If you’re still working, can you find a better-paying job in your field? Could you get additional training, that would lead to a salary increase? Would moving to another town or city provide better employment opportunities?
By consistently earning more than you spend, you’ll be able ensure a secure financial future.
Maximize Your Income
Let’s consider what sources of income you’ll have post-divorce, in addition to income from work if you’re not yet retired.
As part of your marriage settlement agreement, you may be entitled to receive spousal support. Spousal support is meant to limit potential unfair economic effects of a divorce by providing income to a non-working or lower-earning spouse.
However, it’s not necessarily meant to allow the recipient to maintain the same lifestyle they had before the divorce. That would be very difficult, simply because the same amount of income now has to support two households, rather than just one.
Often, spousal support is considered “rehabilitative”, which means that it’s intended for a period only so long as is necessary for the recipient spouse to become self-supporting.
You should include spousal support as a source of income in your cashflow projection, but also recognize that it can be modified – or even terminated – by the court at any time.
Social Security gives spouses and ex-spouses a claiming right to retirement benefits. As a divorced woman, it’s critical to understand the nuances of the Social Security system, and how you can maximize your benefit.
Depending on your circumstances, you can receive either:
- “retired worker” benefits, which are based on your own covered earnings history;
- “auxiliary” benefits, which are determined by your living or deceased former spouse’s covered earnings history; or
- a combination of both.
So, as a divorced woman, your Social Security retirement benefit depends not only on your own earnings history, but also to a large extent on your marital history and the earnings histories of your previous spouse(s). Note that a divorced person with multiple marriages could receive an auxiliary benefit from any of their former spouses.
Although you might describe yourself as divorced, at retirement you may receive a divorced spouse benefit, a surviving divorced spouse benefit, or a widow benefit from Social Security.
Claiming strategies for Social Security benefits can be complex, and making the wrong decision can be expensive, in terms of missed benefits. So, you should consult with a financial advisor experienced in Social Security planning and benefit maximization before making any decisions.
A pension earned during marriage is generally considered to be a joint asset of both spouses. However, it’s up to the divorce courts in your state to decide whether and how pension assets are to be split, and whether survivor benefits are payable. If you’re divorced, a court order – called a “domestic relations order” – is needed to divide a pension.
Most retirement plan administrators will pay benefits from a divided pension directly to you if the domestic relations order meets certain requirements. For private retirement plans, a domestic relations order that satisfies these requirements is called a “Qualified Domestic Relations Order”, or QDRO (pronounced “quad row”).
In most cases, the payments you receive from a divided pension can be paid for the life of the employee/retiree, and also after death (whether it occurs before or after retirement). Note, however, that some state and municipal pension plans won’t make direct payments to former spouses.
The rules for the division of pensions resulting from a divorce are complex, and they vary from state to state, and from pension plan to pension plan. Your rights to a share of your ex-spouse’s pension may also depend on when your divorce occurred.
Income from Investments
As you plan your financial life post-divorce, you’ll want to understand what your share of retirement assets includes. Income from these assets will supplement Social Security (and, possibly, a pension) in retirement.
If you and/or your ex-spouse have an employer-sponsored retirement plan account like a 401(k), 403(b), Thrift Savings Plan or profit sharing plan, you’ll be entitled to a share of the account balance, unless you have a prenuptial agreement that says otherwise. Note though, that if you have a retirement plan account, your spouse is also legally entitled to a share of yours.
As with a pension plan, a retirement plan account will be divided using a Qualified Domestic Relations Order, or QDRO. The QDRO provides a level of protection that the marriage settlement agreement alone doesn’t. It will allow funds in the retirement plan account to be split, and your share to be transferred to an account (typically an Individual Retirement Account, or IRA) in your name, without penalty.
You may want to consider hiring a lawyer who specializes in drafting QDROs. Your lawyer should carefully review the retirement plan’s Summary Plan Description and other plan documents, because the QDRO’s terms must align with the plan’s terms and conditions. Defined contribution plans – like 401(k) and 403(b) plans – are different than defined benefit pension plans, another reason it may be helpful to hire an attorney who specializes in this area.
Amounts added to retirement plan accounts during your marriage are considered marital property, which means that both you and your spouse have a right to them. However, if either of you already had funds in a retirement account before you married, those dollars are typically treated as separate property in a divorce – but the treatment will vary from state to state.
Once you’re retired, you’ll want to make sure that you withdraw money from your investment and retirement accounts in the most tax-efficient manner. Your CPA or accountant, or a financial advisor who specializes in income distribution planning, can help.
Get the Right Investment Mix
If you’re like most people, you’ll rely on your portfolio – your investment and retirement accounts – for income. You may need this income before retirement, as well as once you’ve stopped working.
At Springwater, we believe investors shouldn’t take any more risk with their investments than is necessary to help them achieve their goals.
So, you’ll want to build these goals – like retirement income, health care expenses, travel, new cars, charitable giving, and so on – into your personal financial plan. Once you’ve done so, you and your advisor can determine the right investment mix – also known as the asset allocation – for your plan.
If your portfolio’s investment mix is too conservative, it may not generate enough return to fund your goals. If it’s too aggressive, you may end up getting spooked when the stock market goes through one of its periodic dips, and feel tempted to make changes at the worst possible time.
Plan for Longevity
Even the best financial/retirement plan can be thrown off-course by unexpected events – things like higher taxes, lower investment returns in the future, or higher inflation. But the two biggest potential risks for women planning for or in retirement are longevity and needing care later in life.
Women tend to live longer than men, on average. Depending on your family health history, your plan may need to assume you’ll live well into your 90s, or perhaps even longer. There are now more Americans over the age of 100 than ever before, and the number is growing every day.
A longer life expectancy means a higher risk of outliving your resources. One way to address this risk is to explore buying an annuity from an insurance company. In exchange for a lump sum payment, the insurance company will make regular payments to you for a period you choose – for example, at least 10 years, at least 20 years, or for life. Annuities can be attractive to people who are confident that they’ll live longer than the insurance company thinks they will. Research has shown that annuity income can make a retirement plan stronger.
As America’s population ages, more of us than ever are finding ourselves caring for ageing parents or relatives. Women planning for or in retirement should consider whether they may require some level of care later in life, as well. To address this risk, you can buy long-term care insurance, which provides benefits if you’re unable to perform or need assistance with certain so-called “activities of daily living.”
Whether long-term care insurance makes sense for you is a function of several variables: your family health history, your resources, and your need or desire to shift some or all of the risk to an insurance company.
Long-term care insurance can be expensive, and there’s a fairly simple reason for that: people who own these policies tend to not let them lapse, and a high percentage eventually make claims on their policy.
If you’re not confident that you’ll need care later in life, or that if you do, it will be for an extended period, you can consider putting in place a “home equity conversion mortgage” – also known as a reverse mortgage – on your home, which will give you the flexibility to access some of the equity in your home to cover long-term care expenses, should you need to.
Update Your Estate Plan
An estate plan is made up of a series of documents, each with a different purpose: a will, a durable power of attorney, a health directive and, possibly, a revocable living trust.
The purpose of your estate plan is to protect you and your assets if you become incapacitated or can’t make decisions for yourself, and to ensure that your wishes are carried out when you pass away.
When times are uncertain and the environment around you seems unsettled, it can be comforting to know that you have things in order, and that you and your loved ones are protected.
Get Help From an Advisor
If you need help with financial planning or retirement planning after divorce, consider working with a Certified Financial Planner™ (CFP®) or a Certified Divorce Financial Analyst (CDFA®). Advisors who hold these designations had to meet rigorous educational, experience and ethics requirements.