I’m so happy to have Megan Miller from Harbor Wealth Management here to share her expertise! Megan (and, initially, her mom) have been our financial planners (saviors?) for years, and have helped us navigate from our broke 20s, through the financial-rock-bottom years of having babies, and now into our 40s where we’re starting to discuss those long-term plans that I refuse to call retirement.
Harbor Wealth Management is located in Boulder, CO and is woman-owned and operated. Not only have they taken much of the money-stress out of my relationship, but these are some of the most caring, innovative and smart women I’ve ever met. So when I found out that Megan was also an accredited Certified Divorce Financial Analyst — who also has some strong opinions on the topic — I knew we had to share. According to Megan, too many women are coming out of divorces with the short end of the financial stick. She’s trying to change that.
Key Steps For Financial Planning & Dividing Assets During Divorce
To start with, no one gets married and thinks that their marriage will end in divorce. So this whole process of divorce and the required untangling of lives is a huge, emotional undertaking — one that’s not generally planned for. Even if someone is (more or less) happily ending a toxic relationship, it’s still a very stressful and overwhelming time.
Which might be why so few people want to see a financial planner during divorce. I remember reading a study that claimed most people would rather see their dentist than their financial planner, and that wasn’t even in relation to a divorce! But it couldn’t be more important to set all of those fears aside and dive into your finances headfirst. It is of utmost importance to understand the financial impact (both short and long term) of your divorce.
Getting Divorced? What To Do (And Not Do) During Financial Planning
Getting a divorce is one of the biggest financial turning points in anyone’s life. When working with women going through a divorce, my goal is to make sure that they understand exactly what they are getting (and when), and how it will affect the rest of their financial life. I also want to make sure that the financial picture makes sense for their actual lifestyle — not just on paper. Here are a few of the most common things I see go wrong financially in the process of a divorce.
Get Finances In Order Prior To A Divorce
If you have not yet filed for an upcoming divorce, or are considering the possibility, there are still some smart steps you can take.
- Gather and document as much as you can about your financial situation. Scan copies of tax returns, tax documents, bank and brokerage statements, anything you can find that contains information about what you might be dividing up.
- Start to think about your potential career and how to make a living. Dividing one or two incomes from one household and creating two new households is very difficult. You will likely need to go back to work if you are a stay-at-home parent, and now is the time to start figuring out what that might look like.
- Consider buying clothes and anything else you need for a new career.
- Save money! Start saving money where you can in anticipation of the major expenses that come with a divorce. If you think you have a spouse who will try to make the process difficult, consider opening and funding an individual bank account to maintain control of the money if things do not go well. This is not to hide assets, but rather keep them available for your use if necessary. This is especially important if you don’t have your own income.
Separate Your Emotions From The Numbers
First, and perhaps most importantly, separate yourself emotionally from the numbers part of the divorce. Becoming emotional about an asset will derail your ability to think clearly. I recognize this is a difficult task and most frequently it comes up in relation to the family home. I’ll talk more about that later but do your best to separate yourself from the emotion and think critically about the numbers alone.
Understand Your Assets
Start to educate yourself on what kind of assets you have and what you’ll need. This may be the point where you need to bring in professional help. Learn the difference between the various types of retirement accounts, taxable accounts and annuities. They will all have different rules for distribution and taxation. Don’t forget to review and understand what each asset’s cost basis is and how it will apply to your future tax situation (different assets are taxed differently).
Understanding the implications and costs is actually beneficial to both spouses as one type of asset might be better suited for one spouse than another.
Next up always elicits a sigh: the B-Word! BUDGET! Create two budgets for yourself post-divorce. No one likes the B word, and no one wants to create one, let alone stick to it. You will likely have to create a budget for your divorce proceedings anyway, but I recommend my clients take it a step or two further and create two budgets: one for your attorney to use in court…and a second one for real life.
In your real life budget, ask yourself what you can go without and how to really stretch the dollars you have available. Maximize the amount you can save.
Important Budget Inclusions
Be sure to include taxes and the insurance payments that you will have as a single person. This includes home and car, umbrella liability, health, dental, and life insurance coverage (for both you and your ex-spouse — more on this later). Get in touch with an experienced insurance broker who can help you estimate this cost.
Additionally, most people forget to include savings in their budgets! As a financial planner, I see this as critical, because you are now saving for retirement as a single person, and honestly? It is more than twice as hard. You can no longer count on two social security payments or another income in the event of a job loss. Targeting 10-15% of your income to put to savings is the ultimate goal. Don’t be discouraged if it takes several years to get there.
Another item I have my clients add into their planning is what their budget looks like after any kind of maintenance or support ends. Most states have guidelines that outline payments should last somewhere around half the length of the marriage. This will likely not provide support for the remainder of your working life. How will you continue your lifestyle after those payments end?
For your own good, PLEASE don’t rely on the possibility of remarrying. If it happens that way, great! If it doesn’t, then you can be a financially independent boss of your own life. This is your chance to put your financial life together on your own and for YOU. Consider trying to save some portion of your support payments for the future (and this should only be reflected in your personal budget, not the one for the attorney). This will force you to live on less while also setting aside more for the time when those payments are gone. Ideally, these payments give you time to do what you need to do to grow in your career and create your own future income.
It’s Almost Never A Good Idea To Keep The Family Home
A big part of everyone’s budget is their home. This is the one area I see (over and over) that creates massive future problems for the lower earning spouse. (The world is rapidly changing, but there are still many cases where the wife is the lower earner in a marriage).
In general, I see more women wanting to keep their marital home than men. Women tend to want to keep their kids in the same neighborhood, at the same schools and have as little disruption as possible. I’m a mom, so I get it, I do. However, keeping the family home is almost never a good financial move.
The family home was bought as a couple, and it has been paid for each month with monthly marital earnings. To think that suddenly you can support that household and another one with the same total income is generally not realistic. Ask yourself what it costs each month in terms of a mortgage payment, taxes, insurance and upkeep. Make sure that all of those things are affordable within your new budget. Please, please be careful of giving up all other assets to keep the home. Doing so too often derails someone’s entire financial future because your home isn’t going to buy you groceries in retirement. It’s not an income producing asset. Look carefully at how this will affect you in five, ten or fifteen years down the line.
In addition to budgeting issues about keeping the marital home, there are tax considerations to be mindful of. If you sell the house as a part of a divorce when it’s jointly owned, you generally split the selling costs AND you can exclude up to $500,000 of capital gains tax liability. If, however, you choose to keep the house but then are forced to sell it five years later when your maintenance or support ends, you may only qualify for up to $250,000 in an exclusion.
In most cases, it’s financially best to sell the residence and look to downsize. There are instances where it may make sense to keep the marital home, but they are few and far between. If this is a major decision for you, this is a really good time to bring in professional help to model what this home will actually cost you and how it will affect your financial future.
Take Charge Of Your Insurance Destiny (Including Life Insurance On Your Ex)
Make sure you have adequate insurance coverage across the board as soon as the divorce is final. As I mentioned before, this includes home and car, umbrella liability, health, dental, and life insurance coverage. An experienced insurance broker can help you navigate all these new policies, but be wary of anyone who tries to sell you anything fancy or that contains high fees.
Also, if maintenance or child support is in the picture, be sure to take out a life insurance policy on your ex-spouse. Ideally, you own and pay the premiums on this insurance to ensure you have control over the policy.
In terms of child health care coverage, be careful regarding how the language is written in your divorce decree about who pays for what health insurance expenses. If one spouse has control over the type of health insurance plan for your kids but you have to split expenses, you may end up with higher-than-planned-for costs. Having language in the settlement document about who pays deductibles and co-payments will help ease the burden of unknown costs later. Remember to budget for these payments — every mom knows that kids inevitably will need some high-cost care at some point.
Carefully Review Pension Benefits
Be really careful about giving up pension benefits. Pensions are few and far between and can be extremely valuable in retirement. Most of these can be prorated and split between the spouse that earned them and the other spouse. These near-guaranteed income payments will take stress off of your own retirement savings.
Make Sure You Have Credit (And/Or Open A New Card)
Now is the time to check your credit scores and credit reports. This is to ensure you account for all of your outstanding accounts and debts that exist. If your score isn’t ideal, now is a critical time to do what you can to improve it. Open a credit card in your own name before the marriage is officially dissolved so that you can ensure your qualification based on marital income.
Post-Divorce Financial Checklist
Divorce is final? Congrats! Now here’s a little checklist to run through to make sure your financial future is as bright as can be.
- Update your beneficiaries. Check your retirement plans, insurance policies, bank accounts and workplace benefits.
- Make sure that all assets are split correctly and documented in writing. Ensure that anything that required special documents to split is finalized and you guessed it — get a copy in writing.
- Create an estate plan as a single person.
- Create a new financial plan – this is a bonus aspect of working with someone like me, we provide a complete financial plan after the divorce is finalized to give you a road map of how you can meet your goals. You can find lots of resources online about this as well!
You’ve got this! And if you don’t, find someone who can help you get it! Investing in professional financial advice is almost always going to pay you back many times over during this process.