Negotiating and navigating a divorce settlement can be time-consuming, stressful, and emotionally draining. Ideally, you’ll consult a professional financial advisor upfront to help you map out different settlement scenarios, understand the impact of various decisions you’re considering, and make the best choices for your financial future before agreeing to a settlement (as reviewed in Part 1 of this series).
But the need for financial planning doesn’t necessarily end when your settlement is finalized. In fact, it’s the ideal time to catch your breath, think about where you want to go from here, and develop a plan to help you thrive financially based on your new circumstances.
Related: Financial Planning Services for Life Transitions
Life Changes Bring Financial Changes
Any major life change, including divorce, impacts your finances. Once the dust settles, it’s helpful if you can gain clarity on your situation, decide what you want your future to look like, and develop a plan to turn that vision into reality.
Since your finances affect every aspect of life, assessing your financial situation is a critical first step after a divorce settlement. Depending on the specifics of your agreement:
- You may be working with an entirely different base of assets to fund your retirement.
- You may be assuming full ownership of the family home or purchasing a different home by yourself—either of which might require you to take on a mortgage with less income than you had before.
- You may be facing a measurable decline in household income, but not a corresponding decline in living expenses.
An estimated two-thirds of adults don’t work with a financial planner. But if you’ve just reached a divorce settlement, now is the time to consider professional help. Any life change is likely to bring uncertainty and anxiety, which makes it more difficult for you to take a detached view and map out a methodical plan without assistance.
Financial advisors can help you take stock of your situation and recommend the best next steps to achieve your life goals. They can help you prioritize the financial decisions that need immediate attention vs those that can wait. And they can approach the process rationally, devoid of the emotions that get in the way of sound decision-making.
Financial Knowledge and Confidence Are Key
It’s common in a marriage for one person to take the lead on handling the finances. After all, dividing household responsibilities is a great way to ensure everything gets done. It might be the person who feels more inclined to deal with money, or perhaps one person works fewer hours and has more time to devote to finances.
Regardless, if the marriage ends in divorce, it’s likely only one of the two partners can draw on years of experience with finances to take on that responsibility for their new household. If you entrusted the finances to your ex-spouse, improving your financial literacy can go a long way toward improving your comfort and confidence in taking on the task yourself.
Keep in mind that proper money management goes far beyond paying the bills. It also includes making sound decisions about investing for the future, managing cash flow, and ensuring you have adequate life insurance and other coverages. Working with an advisor can help improve your knowledge and comfort level in handling these important tasks.
Budgeting and Planning Can Be Critical
Regardless of your marital status, developing a budget can be a prudent strategy for achieving your goals and living the life you’ve envisioned. While there are always spending temptations that can take you off track, in the aftermath of a divorce it’s even easier to spend beyond your means. The longer you’re married and living a certain lifestyle, the harder it is to adjust.
Ideally, while negotiating a settlement, you will have made informed decisions about major expenditures, like whether to keep the family home (which might require liquidating substantial assets to buy out your ex-spouse or refinancing the mortgage). But there are many other ways you can spend significant sums that may not fit within your new budget, like buying a luxury car, making major home renovations, or taking expensive trips.
A well-developed budget shows you how much discretionary spending you can afford while staying the course long term. Your budget can account for all your income sources and expenses, including:
- Salary
- Commission
- Bonus
- Dividend or interest income
- Spousal support
- Child support
- Social Security benefits
- Retirement account required minimum distributions (RMDs)
- Living expenses based on your new circumstances
Professional financial planners can use software to model how your income and expenses may change over time and the impact on both your short-term needs and long-term financial goals.
Your Cash Flow Deserves Attention
Once you’ve documented the inflows and outflows, you’ll understand your monthly cash flow, which is the first step in making informed decisions about how to spend going forward. For instance, your cash flow analysis might reveal a need to reduce your expenses or increase your income. Since the latter can be difficult depending on your career history, skillsets, and age, expense reduction is often critical to staying financially sound after a divorce.
Getting an accurate idea of your expenses and income is important for another reason: It can set the stage for determining how long your available assets will last.
Financial planners use sophisticated models to assess how long your assets will take you through retirement based on your projected income and expenses and your current investments. If retirement is a long way off, they might recommend a more aggressive investing approach (within your risk tolerance) to help make up for the financial impact of the divorce.
Proven Strategies Can Help You Adjust and Thrive
Beyond the basics of understanding your new financial situation, mapping out a budget, modeling your cash flow, and determining how long your investments will last, strategies like the following can also be effective post-divorce.
- Decide how and when to claim Social Security. Did you know that if you were married for at least 10 years, and you aren’t currently remarried, you may be able to receive 50 percent of your ex-spouse’s Social Security benefit once he/she reaches full retirement age? If your spouse is at least 62 and 50 percent of their Social Security benefit would be higher than 100 percent of your own benefit, it may be financially advantageous to choose this option.
- Decide how and when to withdraw from retirement accounts. If your divorce agreement entitles you to part of your ex-spouse’s 401k or other qualified retirement account, and you’re younger than 59½, the right approach might allow you to access those funds without incurring the 10% penalty ordinarily assessed when you withdraw retirement funds before you’ve reached the eligible age. You’ll need to wait until the divorce is final and file a Qualified Domestic Relations Order with the retirement plan to ensure any transfer or withdrawal is handled properly and doesn’t result in a penalty.
- Update your accounts and documents. It may not be top-of-mind now, but after a divorce you might need to update the beneficiary on all your accounts and policies; ensure you’re set up to access any account you need to (including tuition payment accounts, which are often overlooked); and update critical documents like your will, power of attorney, or medical power of attorney.
If you’ve finalized a divorce agreement and you’re ready to develop a sound financial plan to secure your future, turn to Team Hewins! Our financial advisors are highly experienced in helping clients navigate the new normal after a divorce. We work closely with you to clarify your current financial situation, help you re-evaluate your goals, and use financial modeling to arrive at a plan for the life you envision. Gain transparency and insight into your portfolio with our complimentary portfolio review.
For help navigating the financial complexities of a divorce, contact the fee-only advisors at Team Hewins.
Team Hewins, LLC (“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas. Certain information provided herein is based on third-party sources, which information, although believed to be accurate, has not been independently verified by Team Hewins. Team Hewins assumes no liability for errors and omissions in the information contained herein. Certain information contained herein constitutes forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future.