Protecting Your Financial Future in a Divorce
One of the biggest concerns people have when they are going through a divorce is how it will impact their finances. Your future is changing, and a big part of that future will depend on what kind of financial shape you’ll be in after the divorce is final. Here are some tips on how you can protect your financial future during and after a divorce:
Know where you stand.
Before you even start a divorce action, be sure both of you know the exact state of your finances. This will help you make rational decisions as you negotiate your divorce. In most marriages, one spouse handles the finances more than the other. If it’s that way in your household, and you’re not the one who handles the money, it’s time for you to learn everything about your income, assets, debts, and the household budget. If you need help, seek out a financial consultant.
Focus on what you need.
In the heat of a divorce, it can be difficult to keep your focus on your needs, not your wants. Emotionally, you may want to keep the house, but do you really need to? Some couples may decide to keep the house until the kids are out of school. But can you keep up with the mortgage payments and maintenance on just your income?
Before you reach a decision, examine the cost of renting or buying a less expensive home in the same school district. Keeping the family home means you will be financially tied to your ex for as long as you co-own the property. You also need to consider health insurance if you’re under 65. If you’ve been on your ex’s insurance through work, you should be able to continue with that coverage for up to three years through COBRA benefits, but you will have to make the payments.
Get financial and legal help.
In general, people involved in a divorce will fare better financially if they hire an experienced attorney to represent their interests. While it may be tempting to “do it yourself” with the help of online legal tools, even if your divorce is an amicable one, you should still have an attorney looking out for you.
Mediation is typically a less expensive option for divorcing couples than going to court, and you will still have an attorney to guide you through the mediation process. If your divorce is more contentious, or you suspect your spouse may be hiding assets from you, your attorney can engage a forensic accountant to be sure you receive all you are entitled to in your divorce.
Budget for after the divorce.
The fact is that both spouses usually suffer financially in a divorce, but you can lessen the impact on your finances if you create a priority checklist and budget for your post-divorce life. If you will have custody of the children and are keeping the house, you will need to budget for carrying these financial burdens on your own.
Your budget will set the baseline for settlement negotiations, so be sure you are thorough. Include things like your children’s activities so they don’t have to quit them because the money runs out.
Negotiate your retirement.
If you are divorcing later in life, your retirement nest egg is probably the biggest asset you own. Even if you have to give up your home to split retirement assets equally, it may be the wiser choice in the long run.
Splitting a qualified retirement plan like a pension or 401(k) plan requires the preparation of a QDRO (qualified domestic relations order). This order allows for the division of qualified plan assets in a tax-deferred manner for the receiving spouse, and provides that spouse with 60 days in which to roll it over into an IRA without penalty.
Establish financial goals.
Establishing clear financial goals will keep you on the right track post-divorce. Even if you are starting over without a big financial cushion, you need to create an emergency fund for any unexpected expenses so you don’t have to go into debt.
Prioritize your retirement over saving for your children’s college. They can always get scholarships or loans and there are no loan options for retirement. Consult with a financial advisor, especially if your ex has always handled your joint finances.