If you are recently divorced or about to be you are probably scared stiff about your financial future. Regardless of your current situation, you have to redefine yourself financially once you cut the cord and that’s frightening.
Rebecca faced that situation not too long ago. She was married to John, a highly-paid executive at a large pharmaceutical company in New Jersey. After five dreadful years, she decided to call it quits. She was 32 years old, a young stay-at-home mom with limited vocational skills and an even more limited understanding of how money works.
Cathy was 53 and in a different situation. After 26 years of marriage her husband Charles decided to “explore other options” and they got divorced as well. Cathy had a job outside the home but didn’t know if her income would be enough to sustain her after the divorce.
Because of their age-specific circumstances, these two people faced very different hurdles. But they share a few common challenges as well. Here are the steps you need to take regardless of which camp you are in:
1. Prepare Yourself For An Emotional And Financial Tsunami
Divorce is like an 8.0 earthquake on the Richter scale. The only difference is that many people have earthquake protection. But nobody has insurance covering the devastation that divorce brings. No matter which side of the table you sit, every aspect of your financial life changes.
- Your net income will decrease.
- You’ll assets will be slashed.
- You may have to find a new place to live.
- You have to learn new financial skills like budgeting and investing
- You’ll have to educate yourself about beneficiary planning, taxes and estate planning.
Don’t expect perfection from yourself and don’t expect to master these skills quickly. Give yourself a little slack and be patient. The good news is that there is no real emergency. Take your time. Slow and steady wins the race. Just stay on track and don’t become complacent.
2. Clean Up/Set Up Your Accounts and Real Estate
Now that you’ve got your mind right, it’s time to get to work. The first order of business is to retitle your non-retirement assets once you obtain your divorce decree. That goes for all bank accounts, brokerage accounts and property.
Get your share of those assets into your own name or trust. You do this by simply opening up a new account and transferring your share into that new account in most cases. And don’t forget to get your name off of any joint accounts.
Once you do this your ex-spouse won’t have any access to your money. This is a simple process and your attorney will give you all the instructions. Don’t sweat it.
You may also need to change your name after the divorce. If you do that you’ll need a new driver’s license, Social Security Card and passport. While you’re at it, go to the DMV and change the registration to your vehicles if appropriate. The last thing you want is for your shlub “ex” to take out a payday loan against your car.
3. Cancel Joint Expenses
Don’t allow your ex-spouse to run up bills you have to pay for. The best way to protect yourself is to remove your name from any joint credit cards and utilities. Some creditors allow you to do so. Others may not. To find out just call them and make a request.
Push those creditors who won’t play balland work with your attorney. Don’t stop until you are free and clear of any future expense your ex-spouse might create.
4. Debts
As part of the divorce settlement, you may get stuck with a portion of the joint debt. To make things worse, your divorce decree is only between yourself and your ex. That means creditors can come after you if your ex doesn’t pay up for his or her portion of the joint debt.
One smart tactic is to have all joints debts replaced with individual accounts as part of the divorce agreement. This way everyone is responsible for their side of the street.
If that isn’t possible you’ll be responsible to make good on joint debt if your prior spouse flakes. Monitor those accounts and demand duplicate statements. That way you can make the payments in case the ex spouse spaces out. At least this way you’ll protect your credit score.
If you do end up having to pay debts that rightfully belong to your ex-spouse you’ll have a claim against them and hopefully you’ll be able to collect down the line.
5. Retirement Accounts
Your attorney will provide you with a QDRO (Qualified Domestic Relations Order) which divvies up retirement assets. Present that document to the retirement account custodians and roll your share of their retirement dollars to your own retirement accounts.
If you are young and the ex is still working they (and you) may have 401ks. In that case you’ll have to work with the plan administrator to get your share of that money. Just make sure you get instructions from your legal counsel and follow it. They will probably ask you to roll the money into an IRA but you may be better off rolling into your own 401k at your work. Make sure you understand the pros and cons of this.
6. Retirement Account Beneficiaries
Married people usually name each other as their retirement account beneficiaries. If that’s the case, you’ll have to make some changes after you get divorced.
If you open a new IRA account you’ll select new beneficiaries. No problem. But if you hold on to old IRAs and/or 401ks, you still have to change your beneficiaries. The last thing you want is for your ex-spouse the creep to inherit your retirement assets when you die. That’s exactly what will happen if you fail to take care of this step.
Often young divorced people like Rebecca have minor children so they have to be especially vigilant. Speak with your attorney about using a trust to leave retirement assets to minor children. If you don’t proceed carefully, your ex-spouse could get control over the retirement money when you die even if it’s left to the children. That’s because he would become the sole custodian of the kids.
If you are closer to Cathy’s age, you also have to think through your beneficiary choices carefully. If you have adult children who are financially irresponsible, you may also want to use a trust to safeguard your assets and their financial future.
7. Investing
Divorced people many times find themselves with a big pot of money after asset sales or a settlement is reached. The problem is they may not know much about investing. If that describes you, take it slow. You don’t have to rush into anything. And keep in mind that you have your own unique financial needs that may be completely different from your ex-spouse. You need your own strategy.
Again, young people like Rebecca have very different needs. Assuming she doesn’t need income from her investments, it might be better for her to invest for growth. Older people who divorce might need as much income as possible. That demands a very different investment approach.
Learn how bonds, stocks and mutual funds work. Talk to friends and interview financial planners. Even if you decide to work with a professional, it’s still important to understand how investments work.
8. Life Insurance
After you cut the knot, your need for life insurance changes dramatically. If you are young and have small children, you probably do need some coverage. But if nobody depends on you financially because you are older, you may not need any life insurance.
But you may still need life insurance on your ex if he or she is making support payments to you and/or your children. Remember, once your ex passes away, those payments stop. Protect yourself. Make sure they carry adequate life insurance or buy it for them. Just make sure you are the beneficiary and your ex-spouse can’t change the beneficiary down the line.
If at all possible, make the purchase of life insurance one of the terms stipulated in the divorce decree.
9. Set Up a Budgeting System
Your financial life as you previously knew it is over. Your income is vastly different after divorce and so are your expenses. Track your income and expenses on a monthly basis starting now. It is really not that difficult to do and is the single most important step you can take to gain and keep control over your financial life.
This is the #1 tool people who are out of debt rely on to stay out of debt. Without tracking your budget, you’ll be flying blind and just may end up in the soup. Don’t take chances like that. Budget your money and stay safe.
10. Financial and Retirement Plan
Just as your income and spending change after divorce so does your financial plan. That’s because all the assumptions that were used to build your old plan are now very different.
It’s important to create your own financial and retirement plan based on your new situation. This doesn’t have to be complicated and you can even do this yourself. Just make sure you create your own financial and retirement plan based on your new circumstances.
The real benefit of a financial plan for young divorcees is that it helps them achieve mid-term financial goals like college funding etc. It also is a great tool that helps determine how much they can and should save each month.
Older people who are newly divorced are often focused on retirement. They use their plans to determine how to best utilize assets to create the most income possible.
11. Income Taxes and Estate Planning
When your financial life is turned upside down, your income tax situation shifts and your estate plan needs to be recreated. Usually, you are better off getting your own CPA and estate planning lawyer rather than use the same one your prior spouse uses. This way, your team will be focused squarely on your needs without distraction. This is how it should be and this is why you probably want your own new team.
Getting your financial life together after divorce isn’t difficult but it does require some work. Take one step at a time. Proceed slowly and stay in action. Get help when you need it and ask a lot of questions. Within a very short time you’ll feel more in control of your financial life and completely independent.
If you’ve gone through this process, what other steps should we be aware of? What one thing did you find most helpful or important? Why? Leave your thoughts in the comment section.
