By Jonathan Blinken | Strategies For Wealth, AAML NJ Bronze Sponsor
Getting divorced can be a painful process. For many it can mean starting over. Unfortunately, that may include starting over financially. This can mean different things to different people - if one spouse was the primary breadwinner in a long marriage, they may be ordered to give a significant portion of their retirement plan to their spouse who focused on raising the children. This may cause concern over how they will support themselves in their twilight years. On the flip side, one spouse might have put their career on hold to raise the family and are now having trouble making ends meet, securing a job, and developing or restarting their own career. That’s why, from the moment you know you are getting a divorce, creating a viable financial plan is one of the most important things you can do. Of course, you can develop a plan and budget on your own, but it may be helpful to seek out professional advice from a financial advisor or CPA who specializes in helping people create their own financial plans, particularly in light of an impending divorce.
Budget Your Way To A Better Future
One of the first things you should do, once you know you are getting divorced, is create a budget with a focus on savings and investment. Remember, without a second income, you should recalculate your needs, and the ability to meet them, and make a reasonable prediction about your monthly cash flow. This may mean a significant change in lifestyle and habits. If you frequently dine at restaurants, you may need to begin to prepare more meals at home. You might need to explore alternative vacations, or a “staycation”, rather than lavish trips. Learning to live within a new set of parameters can be challenging, but it is crucial for your future financial success after a divorce. Create a budget, and stick to it.
Make sure you are aware of all your debts, and work on paying those down as quickly as feasible, particularly high interest rate credit card debt. Then, whenever possible, pay yourself first! Put as much as you can into a savings account for emergencies. Try to contribute monthly to either a retirement plan or an investment account that has well diversified investments to ensure continued and measured growth consistent with your risk tolerance. One of the easiest ways to accomplish this goal is to commit to automate deposits into savings, investments, a 401(k) or permanent life insurance. This eliminates obstacles or excuses that may present itself – or the temptation to spend on the next big thing or bright, shiny object, such as the latest consumer gadget. Building up a good nest egg and emergency fund is a critical step in creating a financial plan after a divorce.
Records And Reality
Keep detailed and accurate records of your current spending. This will be important as alimony, or spousal support, is considered. In many states, the amount awarded is dependent on numerous factors, including the needs of both the recipient spouse and the ability of the other spouse to pay for it. Depending on your personal situation, think carefully about how best to protect yourself. It is important to recognize both ex-spouses often end up with a lower standard of living, post-divorce, than they had when married.
When the division of real property is at issue, be realistic about what you can afford, and pick your assets carefully. Keeping the marital home is often a goal for one or both of the divorcing parties; however, the debt usually comes with it, and if you cannot feasibly afford the mortgage payments each month, you may need to walk away. Think about your short and long-term needs, and make smart decisions.
Don’t Make Emotional Decisions
Try not to get caught up in the emotions. One former client was heartbroken when her marriage to her husband of 30 years ended. The husband offered to give her a generous amount of money for several years as spousal support. She put her emotional pain aside, and sat down with a calculator and her advisors. They analyzed several alternative arrangements, and determined the one that best met her future needs.
While she was tempted by the initial offer, she negotiated for one-half of the couple’s rental property portfolio. Although she needed to pay property taxes, mortgages, maintenance, and insurance on the properties, at the end of the day this would earn her more than she would have received in spousal support, and ensured that her earnings were indefinite. You must be prepared to think long-term in your financial planning, which can often mean foregoing your initial emotional impulses.
Be Aware Of The Tax Man
Many of the financial decisions you make during a divorce can have tax implications. It is important to consult your accountant, or a tax attorney, to ensure that you make wise decisions. For example, it is common for one or both parties in a divorce to have significant assets in their qualified retirement plan. If a qualified retirement plan is divided in a divorce, it is important that the parties do not actually withdraw any money before age 59 1/2. Early withdrawal not only incurs penalty fees (usually 10%) but you will also be taxed at your ordinary income rate for the year that you take out the money, leaving you with significantly less than what you may need during retirement.
No Extravagancies During Divorce
Whatever you do, during a divorce, do not make any major financial purchases. Most states consider anything acquired during the marriage as community property – therefore, you could be forced to repay your spouse for your spending. Additionally, many courts impose injunctions, or orders preventing parties from spending money unnecessarily.
Another former client purchased a boat for nearly $50,000 during the divorce and attempted to keep it a secret. He thought he could get away with it, until he parked it in front of his house for a week. His wife got suspicious and asked for his bank records, where she found a monthly payment to a well-known boat dealer. That $50,000 boat cost my client an additional $25,000 in assets, because he wanted to fulfill his dreams before he was divorced. Patience is a virtue – wait until the divorce is finalized.
Play By The Rules
Always follow the court order. If you have been ordered to deliver property or execute documents to convey it, then you need to do so. If you have been ordered to pay attorney’s fees, then you must do so. Failure to follow a court order can have serious financial implications. The court can sentence the offending spouse to jail for contempt of court, which is not only embarrassing and uncomfortable, but could affect your ability to work. Your property may also be subject to a lien, meaning it is now secured by debts you owe to creditors. If you ever need to liquidate your property, the value will be diminished by the liens on top of it.
Invest In Yourself Post-Divorce
After your divorce is finalized, it is a great time to invest in yourself. You are beginning a new chapter in life. Think about what that means to you, and develop concrete personal and financial goals. For some, it might mean going back to school. For others, it may mean starting a business. Maybe you have always wanted a second home to rent out and increase your income. Whatever it is, find out how much it will cost to invest in you, and determine if it’s worth the money. If it is, come up with a financial plan to start saving and go for it.
Divorce is hard, no matter how amicable. Setting aside emotions and thinking clearly about your financial future is the most important thing you can do for yourself, and your children. Consult with professionals who are familiar with the financial implications of divorce, develop a financial plan, and have patience in achieving it. You may be starting over, but with planning and persistence you can build a strong financial future.
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Financial Advisor at: Strategies For Wealth
New York, NY 10271
Web Page: www.Blinkenfinancial.com
Jonathan Blinken is a Financial Advisor at Strategies For Wealth. His mission is to educate his clients and empower them to feel more in control of their financial life and decision-making.
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Strategies for Wealth is not an affiliate or subsidiary of PAS or Guardian. 2017-46539 Exp 9/19