Financial Considerations Before a Divorce or Separation
Article by R. Joseph Ritter, Jr. CFP® EA
Divorce and separation are difficult subjects. They are hard on you, your spouse, your children, your family and your friends. They are disruptive of life in general. However, in the moment, they can seem like viable solutions to disagreements or distance that have arisen in your marriage.
A factor that, in my experience, is very often overlooked by spouses contemplating or moving ahead with a divorce or separation is financial security. Before the divorce, both of you relied on each other to make the home work. Perhaps both of you held employment, or one spouse was the primary breadwinner and the other spouse coordinated care for the children. Whatever your situation, each of you relied on the economic contributions of the other, probably even taking that aspect of your marriage for granted. Some of these economic contributions include retirement savings, home equity, vehicles, savings and investments, employee benefits, insurance products, and sharing care of children. You also relied on each other’s credit to obtain vehicle loans, student loans and home loans.
During the divorce, the judge may require assets to be divided. Some assets will need to be sold to facilitate this division. If one of these assets is your home, one or both of you will be homeless overnight. Retirement accounts may be divided, diminishing the value of the account that would otherwise benefit both of you. Homes and vehicles may be sold or deeded to one of you. The division essentially destroys the object of long-term financial planning and reduces the total assets available to each of you. If together you had $100,000 in retirement accounts and the judge divided this 50/50, you would be left with $50,000.
Is this a fair trade in exchange for completing the divorce?
Employee benefits suddenly stop, which are no doubt less expensive than what you would purchase on your own. Your right to additional retirement savings stops. And all of the other spouse’s economic contributions suddenly cease.
In short, you could be left saving for your own retirement, buying your own health insurance, conducting your own financial planning, buying or leasing your own home or vehicle, and perhaps going back to work in a field you have not been employed for a number of years.
In the cases that have come through my practice, even though the division of assets may have been equitable, the divorce has put my client in a very awkward and difficult financial position. An example is lack of credit and employment history. One client I will call “Ruth” did not have her own credit and had not been employed in 10 years or more. She was left with a beautiful house and one of the couple’s rental properties. The problem was she had no income, and both houses had mortgages. The assets she expected to carry her through the rest of her life were beginning to dwindle.
Basically, she wanted the life she enjoyed when she was married, but that was now no longer possible without the economic contributions of her husband who, by the way, had a very well paying job.
It is good to speak with your minister, marriage counselor and divorce attorney before going past the point of return on the road to divorce. However, it is equally and vitally important that you also visit with a qualified financial planner to assess what your financial welfare may look like post-divorce.
If living in poverty after a divorce is not your thing, then the only viable solution is to work things out. The clients I have counseled cannot do that now, however, they also had no idea of the life they would be living after the divorce was final.
Here is a question to consider before signing and serving divorce papers: What was it that brought the two of you together in the first place, and what happened to that now? It is surprising the myriad of challenges many marriages have weathered and overcome. Your marriage is worth saving if you are willing to give the effort your marriage needs to survive.
Perhaps for right now your best course of action is to surround yourself with a set of advisors, such as your spiritual mentor or minister, a licensed counselor and a financial planner. Then you can be in a better position to evaluate the best next steps.