Divorce planning involves taking careful steps to manage finances during a significant life transition. By examining assets, understanding joint financial responsibilities, and assessing future income and expenses, individuals can make informed choices that help create stability. In addition to dividing assets, divorce planning may include considerations like retirement accounts, health insurance, and child support or alimony arrangements. Preparing financially for a divorce helps individuals establish a clear financial outlook, supporting a smoother transition to the next phase.
Major life events like divorce, marriage or the birth of a child can have a significant impact on your finances. A financial advisor can help you plan and respond to these changes.
Divorce Planning 101
You may consult a lawyer while going through a divorce, but consider speaking with a financial planner as well.
A financial planner can help you ensure you’re getting your fair share in the divorce settlement. This is certainly true if you haven’t taken an active role in managing the family finances. If you aren’t actively managing the budget, paying bills, or contributing to retirement or investments, consider seeking help.
There are financial professionals specifically licensed to deal with the financial challenges that come along with divorce. For example, Certified Divorce Financial Analysts (CDFA) deal with asset distribution, tax laws, and financial planning. You will likely encounter all those financial issues during a divorce.
Know Your Assets
Next, you’ll need to determine your assets before deciding how to divide them.
Compile a list of all accounts and assets, including checking and savings accounts, investment accounts, and retirement accounts. The latter includes 401(k)s, IRAs, pensions and even HSAs. Meanwhile, look for paystubs, outstanding loans, property deeds, and the like. Also, print out bank statements, credit card statements and income tax returns.
If you don’t have access to those documents, call your financial institutions and request them. If your name is on the account (and it should be), they must provide you with copies.
Calculate a New Budget
A major part of divorce planning is determining ongoing payments such as spousal and child support. You’ll need to determine your average monthly budget, retirement contributions, and other living costs. Those living costs can affect future settlements and spousal support.
Will you will stay in your home or downsize? What do you pay for monthly utilities and other bills, such as car payments, tuition payments or retirement contributions? Factor in the cost of childcare if you were previously a stay-at-home parent and will be returning to work. What is the cost of caring for your children if you will be the primary caregiver? What are their transportation costs, entertainment and clothing costs, and even expected home or car maintenance? Also budget for your legal bill.
You’ll also need to consider the costs of medical insurance. If you can get it via your employer for yourself and any children, enrollment should be relatively simple. However, if you were covered by your spouse and you were a stay at home parent, you’ll need to enroll in COBRA, which can be pricey.
Next, compare these numbers to your current salary and any child support or spousal payments you’ll to receive. Make sure the numbers add up in your favor. However, don’t be afraid to speak up for fear of rocking the boat. It can be much more difficult, if not impossible, to change the settlement or spousal support payments later.
Spend Conservatively
You may want to stick to a conservative spending plan during a divorce. First, you may now know what expenditures lie ahead. Meanwhile, you will likely have a few sunk costs that you’ll need to cover. For example, your legal bills, COBRA costs, and potentially the cost of temporary housing.
Secondly, if you plan on receiving spousal support, you may not know exactly when you’ll begin to receive it. That’s especially true if divorce proceedings drag on. Finally, you may not be legally entitled to make any large purchases until your divorce is finalized. As a result, you may consider waiting until everything settles before splurging.
Recalculate Retirement and Estate Planning
After a divorce, you’ll need to readjust two long-term financial goals: Your retirement planning and your estate planning. If you were a stay-at-home parent and your spouse held your family’s primary retirement account, you are legally entitled to a portion of it. However, the percentage varies by state.
Keep in mind that you may need a Qualified Domestic Relations Order (QDRO) to obtain these funds. While this court order can sound intimidating, it may be worthwhile. It ensures you’ll get the funds you’re owed. That includes retirement, spousal, and child support. Meanwhile, it also allows you to roll over your portion of the retirement funds, penalty-free, into a retirement account of your own.
As for estate planning, be sure you have a new beneficiary claimed (likely one that isn’t your ex-spouse). You also may need a new will, and a new power of attorney in place. A financial advisor or a Certified Divorce Financial Analyst (CDFA) can help you get your estate, as well as your retirement planning, in order.
Bottom Line
Planning ahead and working with a financial advisor can minimize the financial impact of divorce. Even if divorce isn’t imminent, divorce planning can save your assets even if you can’t save your marriage. When going through a divorce, it’s wise to get a comprehensive overview of your assets, including copies of bank accounts, retirement funds, and tax returns. If you know what you have before the divorce and what you’ll need afterward, financial divorce planning can save you at least a few difficult decisions in advance.
Financial Planning Tips for Divorce
- If you’re not sure how to prepare your portfolio for divorce, a financial advisor may be able to help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Do you know if you live in a community property state? What do divorce laws look like in your state in general? Familiarize yourself with the specific laws of your state as soon as you can so you can plan for how the process may play out.
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