Ending a marriage? Don’t get divorced from financial reality in the process

A lawyer may be your first call when you decide you want a divorce, but a financial advisor should be your second.

In many cases, a divorce has more impact on a person’s current and future financial well-being than any other event in their lives. Sound financial planning may be the last thing on your mind when your marriage ends — particularly if it ends in conflict — but it may never be more valuable.

“Divorce happens in an emotionally charged environment and you’re making financial decisions in a few months that will affect you for the rest of your life,” said certified financial planner and certified divorce financial advisor Michael Ruger, partner and chief investment officer at Greenbush Financial Group in Albany, New York. “People often don’t look far enough ahead.”

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The first thing to understand is that for everyone but the very wealthy, divorce will hurt your standard of living. Two households are more expensive to maintain than one, and if one person in the marriage has been a stay-at-home parent, there is less income and assets to go around.

A settlement, whether mediated or litigated, will almost certainly reduce your quality of life.

Secondly, unless your marriage was short-lived and is ending amicably, you have no children and little marital assets and income, you should consult both a lawyer and financial advisor.

Online divorces are dirt cheap but a good idea only for very simple circumstances with mutually acceptable terms. The mistakes made in a divorce settlement have long-lasting financial effects.

“People make mistakes in the divorce process that leave them vulnerable,” said Stacy Francis, a CFP and CDFA and president and CEO of Francis Financial in New York. “We can’t make everything alright but having a financial plan that shows you what a settlement looks like three years out and 30 years out helps a lot.”

1. Mediation versus litigation: A divorce settlement mediated with a collaborative approach has some major advantages over litigation. It typically costs less and has higher compliance rates than with litigated settlements.

More importantly, it can save you the emotional fear and loathing that comes with litigation in divorce court. The biggest potential downside is that if the mediation doesn’t work, you’ll end up in court anyway prolonging the ordeal.

“There are amicable splits but it’s not usually the case,” said Francis. “There can be a lot of conflict about what a settlement will look like.

“Just as there were conflicts in marriage, they often remain in divorce.”

2. Budget for the long-term: A clear understanding of your long-term living expenses is crucial to negotiating support payments and a settlement you can live with. That’s particularly so for parents who retain sole custody of children.

Tutoring, special needs, extracurricular activities, orthodontist work and college are among the future expenses that need to be addressed in a settlement. Alimony and child-support payments should be backstopped by an insurance policy.

“When you come to the negotiating table, you have to think about your expenses not just two to three years after divorce but 20 and 30 years out,” said Francis. “The more you can discuss about current and long-term needs — particularly if there are children involved — the better.”

3. Watch your assets: Marital assets are not all created equal. A savings account with $100,000 is worth much more than a joint retirement account that will eventually be taxed or equity in a home of that amount. Make sure you consider the after-tax value of all assets and the different risks that they present.

Holding onto the family home could be a very heavy financial burden. While it may be a source of comfort in a difficult time, it could come back to haunt you.

“Mothers with custody of children often understandably want to keep the house,” said Ruger. “Then they come to us, and we have to tell them they can’t afford it and have to sell it.”

If there are more complicated marital assets such as private equity stakes, restricted stock, business interests or even cryptocurrency holdings, an advisor is essential to evaluate them.

4. Mind your taxes: Like everything else in life, divorce settlements have big tax implications. Understanding how different assets and income streams are taxed is crucial to the equitable division of assets.

Francis also suggests that people be aware of things like pre-paid taxes that may have come out of the marital pot but could be refunded to a former spouse.  

5. Update your life: The key things to address when your divorce settlement becomes final include updating your will, powers of attorney, beneficiaries and other estate-planning documents to reflect your changed circumstances.

If you have been out of the workplace for an extended period, think about whether you need to return to it and if you need training to help you get back to work.

“It’s hard telling a stay-at home parent that they should go back to work but in most cases they eventually should,” said Francis. “A person’s most important asset is their earning capability.

“It can help you add to your nest egg and enable a better retirement.”