Getting Divorced — Preparing for Better Times Ahead

More marriages than perhaps we choose to think about end in divorce. Clearly, despite our best efforts, divorce happens. And when it does it can be emotionally and financially devastating for everyone. Unfortunately, there’s not much you can do to offset the emotional effects. But with a little care you can offset some of the financial stress and focus on building the next chapter in your life.

Dealing with the financial challenges

You don’t want to have financial stress in addition to the other difficult issues you face. To avoid unexpected financial stress you will need to be familiar with things such as property rights, alimony, debt, taxes, retirement plans, child custody and child support. You’ll most likely seek the advice of an attorney. To better prepare you for those conversations, here are a few things you may want to consider doing to help protect your financial well-being:

• Revise your will, trust and beneficiary designations on IRAs, retirement plans, bank accounts, and insurance policies to remove your spouse if you choose.
• Review your life insurance coverage.
• Check your health and disability insurance. If you were covered under your spouse’s employer-provided insurance, you may need to look for other coverage options.
• Understand the income tax implications and how those liabilities may factor into your settlement.
• Confirm with your credit card companies the process for having your name removed from all credit or debit cards that could be used for future purchases by your spouse.
• Review your retirement assets, as well as your spouse’s retirement assets, and understand how the divorce may affect your retirement savings (pensions and retirement accounts are considered as part of the divorce settlement).
• Create a new “single income” budget. Large expense items such as housing costs may change dramatically, and that can affect your ability to balance your budget going forward.
   

Avoiding emotional mistakes

It’s difficult to keep a level head during this emotional time. But it’s essential that you do. Here are some common misconceptions that often drive behavior :

• Don’t assume the equity in your house will fund retirement savings. Compared with retirement savings, a home is likely to have regular ongoing and unexpected expenses. Its future value is more of a question mark, and using your house to finance retirement is more complicated than the money readily available in a 401(k) or IRA.
• It’s not always better to roll it over. Sometimes it’s better to roll over money into an IRA and sometimes it’s not. For example, divorcing spouses under age 59½ can withdraw cash from their ex’s 401(k) or 403(b) without owing the normal tax penalty, and many assume it’s better to immediately roll it into another IRA. But if you roll the money into an IRA and then pull some out to cover costs, you’ll have to pay the full 10 percent early-withdrawal penalty in addition to the income taxes that will be due.
• Don’t dip too deep. Many people make the mistake of withdrawing too much money from their retirement savings just in case they need it. Remember, you’ll need to live on your retirement savings for 20 or 30 years.
   

Plan with us

Divorce can be difficult, and you don’t want unnecessary financial difficulties piled on top. So talk to a financial professional to develop a plan that‘ll help put you on track for better times ahead.