Ending a marriage is never easy. Even in an amicable separation, it’s a major life change that will inevitably affect your finances. Making a post-divorce financial plan may feel intimidating or surreal. It’s common for people to wait until their divorce is final to start sketching out their financial future, but the best time to plan for an impending divorce is always now.
At JJ Burns & Company, we’ve helped countless people reimagine their finances before and during a divorce. We understand how difficult this transition can be. We offer a compassionate ear and expert financial advice to guide folks through to their next chapter. Here are some steps we take to do just that.
Review Your Pre-Divorce Finances
Whether you’re thinking about separating, have already done so, or are in the middle of a divorce, your financial life is probably undergoing some big changes. Legal fees alone typically add up to around $7,000 to over $100,000, but can easily go higher. We often begin by looking at a client’s pre-divorce finances. That includes you and your spouse’s:
- Income and monthly cash flow
- Regular expenses
- Financial goals
- Retirement timeline
The point of this exercise is to get a feel for how much your current lifestyle costs. State laws will determine how joint debts and assets are divided during a divorce, but a capable CERTIFIED FINANCIAL PLANNER™ can help you get the lay of the land.
Anticipate Your Post-Divorce Finances
Now think about how your financial life might change after your divorce is final. Here are some important considerations:
- Where will you live? Do you plan on staying in the family home? If so, and you’re expecting to buy your spouse out of their ownership position, do you have the funds to do it? And will you be able to comfortably afford your new monthly payment? Alternatively, your spouse may keep the home, or the two of you may choose to sell it and split the proceeds.
- Will alimony and/or child support be a factor? Depending on your state’s laws, you may be obligated to pay spousal support (alimony) and/or child support. That could translate to a significant monthly expense for the foreseeable future. While these payments were once tax-deductible, that’s not the case for divorces finalized in 2019 or later. If you expect to be on the receiving end of alimony and/or child support, know that this money isn’t considered taxable income.
- What new expenses will you have? On top of your housing payment, and possibly alimony and child support, you might have some other new expenses. If, for example, you’re currently on your spouse’s health insurance plan, you may have to pay for your own coverage after the divorce. You might also have new childcare expenses, depending on your custody agreement. This may be the case for stay-at-home parents who plan on working after their divorce. And don’t forget about joint debts that you may acquire. Again, state laws will determine how debts are allocated during a divorce.
- How will your tax situation change? Filing your tax return jointly as a married couple provides a more generous standard deduction. That will change when you begin filing as an individual. If you have children, you and your spouse will also need to decide who will be claiming them as dependents.
- What assets can you negotiate for and get control of? One would think that it’s easy to split dollar or portfolio weighted assets, but the reality is how the assets are held such as in tax-advantaged accounts like IRA/401(k) vs. after-tax accounts like jointly held or non IRA/qualified accounts. It’s also vital to value your assets and to know the cost of acquisition so you may calculate what you actually receive after taxes. Think what you purchased your home for and what you added to it to arrive at a proper cost basis, and then calculate the potential tax you may have by keeping or ultimately selling in future. Working with an experienced advisor is key to understanding how these matters all intersect and what they mean for your short- and long-term future.
Seeing everything in black and white should help you identify any gaps in your pre- and post-divorce finances. An experienced CFP® professional can then help you bridge those gaps and plan for the future. That includes adjusting your retirement planning. Will you have any retirement funds in your name following the divorce? Either way, now is the time to think about how you’ll approach retirement saving when you’re no longer married.
At JJ Burns & Company, we help our clients go into mediation or divorce proceedings feeling empowered—instead of like a deer in headlights. Reconfiguring your finances will take time and follow-through. A CFP® professional has the training and experience to guide you through these uncharted waters. A divorce can be a momentous transition that disrupts your financial life. What matters most is fine-tuning your finances so that you’re able to move forward as strong as possible. Reach out today to start preparing your finances for your post-divorce life.