Sep 25, 2020
Anthony’s transition from the Big Apple to the City of Bridges in January was anything but smooth. Not only were he and Connie soon in the midst of a COVID-19 global pandemic, they were already in the midst of a troubled marriage.
After nearly ten years, Anthony felt he was nearing his wits' end. His single buddies back home were telling him to “free himself.” Not surprisingly, his married buddies were telling him to stay put and work it out. Anthony’s expectations were that a fresh start in a new environment might be what he and Connie needed.
As a CERTIFIED FINANCIAL PLANNER® practitioner, and a Certified Divorce Financial Analyst®, I have seen couples like Connie and Anthony before. When we first met, I had my “planner” hat on and established them as new clients. Now, however, if they cannot work things out, and they opt to move to the next step, they can try alternative dispute resolution methods, such as mediation or collaborative divorce, which, by its very nature, moves them out of the courtroom.
A CDFA® Looks at the Present; A CFP® Looks at the Future
A lot goes into the divorce process. The attorneys are experts in their fields and CDFAs are experts in finances. We don’t give legal advice; we support the attorneys and the clients with key financial data. Generally, we think from the legal side of things, but there are also many financial decisions to make. Divorce is not just about splitting assets. It’s more like, “What are the tax ramifications of that?”
If only one spouse is working, we have to consider health insurance, life insurance and creating a new budget. There might be a pension, which is a particularly difficult asset to value, mainly because a pension is going to be worth X amount of dollars, and you are going to get $2,000 annually for the rest of your life. We figure out how to calculate that and what Social Security is also going to look like. Basically, in post-divorce, we start over.
We project his or her future budget analysis, evaluate their tax returns, and figure out what deductions are claimed together. We decipher if there are any “hidden” assets. Sometimes, people honestly don’t know what they have, and others are not always as forthcoming as they should be. Inventory your assets, know what you have and make copies of everything. Usually, one spouse handles the finances, so the other spouse must have a handle on the finances as well.
For those 50 and older, our work becomes even more relevant because the grey divorce rate in this age group has doubled. Many ask, “Why now?” The answer is because life is changing. Theses folks might be empty nesters, experiencing mid-life crisis, career change, or thinking more about phase two of their lives and retirement. Surprisingly, even peer pressures from those who have been through it can affect them. It is also more complicated because they have a greater net worth, which can lead to greater mistakes as well. Obviously, they have certain lifestyles and expectations.
It is not like working with younger couples where we just split up checking and savings accounts. These assets are much larger. We split up big 401(k) plans and huge houses, long-term care insurance and more, so it is my job to help them through this and work it all out. It is a basic reboot of the financial plan. At Hefren-Tillotson, it is our MASTERPLAN®, to put together your priorities and your net worth, your non-qualified assets and retirement assets, and then set realistic expectations for you in any situation.
The Post-Divorce Budget
When life changes, money changes. And when money changes, life changes. No one comes out of divorce financially better. The goal is to come out with as little debt as possible, with a good emergency reserve, a reasonable budget, and knowing where income will come from. It can literally come down to lifestyle and what your retirement expectations are.
Divorce cash flow is crucial. It is the first thing to address with Connie and Anthony. Hashing out the budget and where they live are equally important. If there is a marital home, if one person stays there, or if they decide together to sell it and split the proceeds, and then either rent or buy are all on the table. Traditionally, when couples have kids, there are huge memories tied to the marital home.
Many times, mothers opt to stay in the home, often one of the largest assets in the marital estate. When figuring out a distribution, which typically starts at 50/50, if she keeps the home the husband keeps the 401(k), an asset that appreciates and is used for retirement. The home, however, while it has value, also costs money to keep up. Aside from the mortgage and the maintenance, paying the taxes is often very difficult for one spouse. In my experience, and in most situations, it is best if there is a mutual agreement to sell the home.
Information Worth Knowing
Since 2011, I have been helping people go through one of the most difficult periods in their lives. With simple and straightforward divorce cases, I cannot be of much help. But with others, that include businesses, large pensions and 401(k) plans, I can be extremely helpful. Mainly, I want to ensure the decisions you make will help build a strong financial future beyond your divorce.
And that’s why it is important to note that you have no control if you choose litigation in the courtroom. You have some control with mediation, and you have the most control with collaborative divorce because there is teamwork and transparency. With Connie and Anthony, I can be a resource if they take the collaborative route. But know that this route is not for everybody. If you can work it out, it generally will produce the best results. You work together, arrive at solutions together, and are not told by a third party "how it is going to be."
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