Financial difficulties can irreparably damage a marriage, and they’re often the primary trigger for a divorce.
Once a couple decides to separate or divorce, many questions will arise. Unfortunately, if a couple was unable to solve their financial problems while married, it’s unlikely that they’ll be able to do so when their relationship has ended. This is why working with a Certified Divorce Financial Analyst® (CDFA®) can help you financially survive a divorce.
What is a CDFA®?
The first stop for people who have decided to separate or divorce is a lawyer. Unfortunately, many lawyers are not familiar with the complex and intricate financial details surrounding dividing pensions, projecting future investment risks and returns and so on. Lawyers are legal experts, not financial professionals.
A CDFA®, in contrast, is a financial, legal, or accounting professional who has undertaken an intensive training program to develop the skills and expertise needed to provide guidance related to the financial aspects of divorce.
Let’s look at just a few of the important ways.
A CDFA® is a Part of Your Divorce Team
A CDFA® can either work just for you, to provide you with objective advice that’s in your best interest, or as a so-called “third party neutral,” advising both you and your ex-spouse on the financial aspects of your divorce settlement. In either case, the CDFA® professional will bring a level of expertise to the negotiations that an attorney probably won’t have.
Having financial expertise in your team can help ensure that both parties understand the serious implications of decisions made around your pre- and post-divorce finances.
Equitably Dividing Assets
During divorce negotiations, it’s common for spouses to negotiate the division of marital property. This is normal, and it’s part of reaching a fair settlement. It’s important to note that this doesn’t necessarily mean an equal division – a settlement can be fair (or “equitable”) without being equal.
As you prepare for this process, you’ll want to keep in mind that what matters is not just which assets you want to keep, but which assets will be best for your long-term financial security. For example, you may want to keep your marital home after the divorce so that you can provide your children with a sense of stability and security but doing so may not be in your best interest financially. Working with your CDFA® professional to understand the short and long-term implications of different asset division proposals can help you avoid financial mistakes during your divorce.
Need guidance financially preparing for or navigating a divorce? Contact our team at Springwater Wealth today to learn how we can help.
Determining Your Income Needs
If you’re contemplating getting divorced, or are already in the process, you’ll want to have a very thorough understanding of your finances. The harsh reality for most people post-divorce is that their lifestyle isn’t what it was when they were married. This is because the same income level now needs to support two households rather than just one.
Depending on the length of your marriage (and other factors), you may be entitled to receive spousal support after your divorce; if you have children, then child support may also be involved. If you’ve never prepared a budget before, it can seem like a daunting task. While it’s not complicated, it can take some time to get together a comprehensive overview of what your total spending will look like. Your CDFA® professional can help you prepare an accurate budget for your post-divorce life, taking into account not only your core living expenses, but also financial commitments like education and other costs for your minor or adult children, support for ageing parents, etc.
By helping you gain a thorough understanding of your new cash flow needs, and creating a detailed, comprehensive budget, your CDFA® professional can ensure that you don’t underestimate your income need, and avoid a financial mistake during your divorce.
Evaluating Your Insurance Needs
When compared with the emotional stress that a divorce can create, insurance matters may seem insignificant. But insuring against certain risks is critical to securing your financial well being and that of your loved ones.
Your divorce settlement may require that your ex-spouse carry a life insurance policy naming you as the beneficiary. This arrangement will ensure that if your ex passes away the life insurance death benefit can replace alimony or child support payments.
Disability insurance is arguably more important that life insurance, because you or your ex-spouse are much more likely to become disabled than you are to die prematurely. If you earn an income, you’ll want to have your own employer-provided or private disability insurance policy. If you’re entitled to receive alimony or child support, you’ll want to make sure that your settlement agreement requires your ex-spouse to carry adequate coverage.
You can keep your health insurance after you’re divorced if you have your own coverage. But, depending on your state’s law and the type of health plan, you may not be eligible as a dependent on your ex-spouse’s employer-sponsored health plan once your divorce is final.
Insurance matters can be complicated in the best of times, let alone when you divorce. Your CDFA® professional can help you evaluate the coverage you need, so that you avoid a financial mistake during your divorce.
Planning for Your Retirement
The emotions and stress that accompany a divorce can make it difficult to focus on anything other than getting through the next day or two, but the decisions you make during the settlement process can have a profound effect on your financial future, including the security of your retirement. For example, you may be tempted to opt for a lump sum payment rather than a share of your ex-spouse’s defined benefit pension, because you see a long list of expenses in your short-term financial future, but depending on a variety of factors, choosing instead to take a share of a pension may be far more attractive for you long-term.
Similarly, your CDFA® professional can help understand the tax consequences of accepting taxable assets versus retirement assets in your settlement negotiations. While accessing retirement account dollars too early can have tax consequences, the benefits of tax-deferred growth over what may be decades before your retirement can make these accounts very attractive.
Planning for your retirement, including when you plan to stop working and how much income you’ll need when you do, can ensure that you’ll enjoy financial security later in life. Your CDFA® professional can help you determine what you’d like your financial future will look like, and help you avoid a financial mistake during your divorce.