When I asked Arlene Brown, Certified Divorce Financial Analyst® and Chartered Financial Consultant®, the first word to come to her mind with the word “divorce” she said, “expensive.” Then she expanded. “It’s expensive both financially and emotionally.” The impact of money, both as a cause of divorce and as a source of stress after a divorce, can hardly be over-emphasized.
Financial disagreements are strong predictors of divorce compared to other marital issues, and they are even considered the strongest predictor with men. Even though approximately 50% of first marriages and up to 70% of second marriages end in divorce, one financial planner (Francis, 2012) claimed that might not be high enough since many couples stay in “unhealthy” and even “abusive” relationships to avoid the financial consequences that result from a split.
What’s Involved in the Financial Planning Process for Divorce?
Divorce, indeed, can be expensive from a financial standpoint and it often requires participants to keep their emotions in check and engage in a significant amount of financial planning. In my personal experience as a financial planner for over 30 years, people tend to spend more time planning vacations than they spend planning for the longest vacation they will ever take, which is their retirement.
With an impending divorce, the participants are now forced to think into the future. Using sophisticated software programs, Certified Divorce Financial Analysts® will often model expected cash flows, assets, taxes, and savings from three all the way to thirty years into the future. This is done to help participants answer one of the primary questions that is often on their minds: Am I going to be okay?
One of the first things to consider is the fact that two households will have to be supported on what may be the same income that supported the family prior to the divorce. This will be a strong consideration in the negotiation stage of the process. If one spouse did not work outside of the house, they will have to start to think about what kind of work they be able to engage in after the marriage ends. It may be wise to negotiate help in paying for education or training to get back into the workforce. If the couple owns a home together, it may be wise to consider selling the home and buying or renting smaller residences.
Dividing assets can be challenging for a number of reasons. Tax implications, differences in income and education, custody issues, priorities and a myriad of other considerations enter the picture when considering a split.
It is not unusual that one, or sometimes both, spouses entering a divorce have only a vague understanding of their financial picture. Therefore, one of the most important steps early in the process can be doing an inventory of assets. Gathering information on your residence, bank accounts, employee benefits, contributory retirement plans (401(k)s, IRAs, Roth IRAs, etc.), pensions, business assets, rental properties, taxable investments (also known as “non-qualified” accounts), and any other assets of value, will be critical to determining a fair settlement in the divorce. Retirement accounts may ultimately be split using a “Qualified Domestic Relations Order” allowing the transfer of money that would normally be taxed and penalized between spouses in the divorce process.
Some assets may be nearly impossible to separate so it is important to have a good idea what everything is worth. For instance, an ongoing business may be illiquid and run solely by one spouse. That may make it necessary to give the non-business-owner spouse other assets (bank accounts, retirement assets, home equity) to avoid the sale of the business. Gathering three year’s tax returns will be important, as well, to understand the family income picture.
The splitting of assets can have great impact on older people going through divorce—so called “silver” or “grey” divorce. This is because of the concept of time value of money. In finance, we use a term called “the rule of 72.” If you take 72 and divide it by your assumed interest rate on the growth of money, it gives you the approximate amount of time for money to double. For example, the average historic return for large US stocks is approximately 10% per year from the mid-1920s through 2020. At that rate of return, money has doubled, on average, every seven years.
This is why I often tell younger people to avoid procrastinating when saving for retirement. Every seven years they wait, they may cut their retirement in half. Now consider the fact that an older couple may have significantly fewer 7-year periods between the divorce and retirement, and it is easy to see the exaggerated impact that divorce may present.
How is Alimony Counted?
In the past, alimony was a deductible expense for tax purposes and it was taxable for the receiving spouse. Now it is no longer deductible and is not taxable to the recipient. While, on the surface, that may sound good to the person receiving the payments, it may result in lower payment streams. The reason for this is the differential between the future tax rates of the payer and the tax bracket of the person receiving those payments. For example, if one person was going to be able to save 30% on their taxes for an alimony payment to an ex-spouse who is in a 10% tax bracket, then they could have paid more due to the “subsidy” from the federal government. Now this will likely be considered by the parties in the process of negotiating a settlement.
Since alimony may come into the picture in the divorce process, it is important to think about life insurance on the payor. This ensures that money will be available in the event of a premature death of an ex-spouse. The court may require that the ex-spouse be named as an irrevocable beneficiary to help guarantee payment of obligations. This may also be important for guaranteeing that funds will be available for college expenses of children of the marriage. It may even be a wise decision to consider disability insurance coverage. It can be disastrous if the paying spouse is taken out of work due to a loss of income due to illness or an accident. Now they are not producing an income and they still need money for personal maintenance.
Impact of Divorce on Social Security
One of the other areas I tell people to consider when contemplating divorce is Social Security. If a marriage lasts at least 10 years, then a divorced spouse may be eligible for benefits based on their ex-spouse’s earning history. There is a requirement that they not get remarried prior to age 60 to be eligible for spousal benefits. This can also be of importance if a higher earning ex-spouse predeceases.
According to the Social Security Administration, a remarriage after the age of 60 will not affect the ability to receive survivor’s benefits. In other words, a surviving spouse who was married to someone with a high income history and, therefore, a large Social Security benefit, can receive their ex-spouse’s benefits after their “ex” passes even though they are remarried.
Social Security should also be considered when considering the equitable distribution of assets. If one spouse has limited work history, they may try to negotiate for more of the asset pie since they may have limited benefits in retirement. Unlike the previous scenario, the circumstance may end up where the lower income spouse does not get any of the ex-spouse’s Social Security due to early remarriage or the ex-spouse not predeceasing. If their own benefit from work history is more than half the benefit of their ex-spouse, they may not qualify for any spousal benefits regardless of how long the marriage lasted.
Other Important Considerations
Another item that a couple entering into a divorce should consider is legally establishing a separation. This is not only a signal that they are starting a new life on their own, but it can also help protect money made after the date of separation. This can be an aid in avoiding having that money split down the middle in the future. It is also important to pull credit reports (www.annualcreditreport.com) in order to know what debts are held and monitor any activity taking place. It is good practice to get a “temporary order” to protect against bad financial behavior by a spouse who might be inclined to run up debt after the separation.
A “mandatory injunction” that helps ensure the financial “status quo” automatically goes into place upon filing for divorce in the state of Tennessee. This is important because it is not unusual for emotions to run high during this process. People often associate money with powerful goals and needs like security, success, love, and autonomy (Dew, Britt & Huston, 2012), so there can be a high risk of someone experiencing feelings of scarcity during this process. It may motivate them to take actions that would be out of character under normal circumstances.
It is important to keep in mind that creditors do not cancel debt obligations just because a couple has filed for divorce. Keeping track of your credit and your credit score can be an important step in reestablishing your financial life once the divorce is settled.
Inheritances can also end up being affected by the dissolution of a marriage. This may especially be true if one or both spouses end up getting remarried. It can be a source of great contention when the new wife and stepchildren become the heirs to a large estate rather than the children of the original marriage. This may be another use of life insurance as a replacement asset. It may be advisable to utilize an income trust to provide income to the new spouse for as long as he or she lives with the corpus (or remainder) of the asset going back to the original children. This is an area where planning can become a creative endeavor.
Another implication of divorce is the cost of going through the dissolution process. It is wise to count the cost and set aside assets to pay for the expenses to be incurred. In addition to attorney’s fees, there may be costs incurred for business valuations, arbitrators, mediators, counselors, financial planning, vocational experts and other expenses. This will be in addition to normal life expenses that do not disappear just because a couple is divorcing. It is often difficult to juggle expenses and budget before a divorce occurs. These expenses can add a layer of stress on top of the emotional stress that usually accompanies a divorce. Planning can help alleviate some of that stress.
One piece of advice that Arlene gave regarding someone contemplating or being informed that their spouse wants a divorce is to “keep your emotions in check.” She said, “the less you say, the better.” This is hard for many to do, because lashing out is often a natural reaction for someone about to enter such a challenging time. She advises those contemplating or going through divorce to remain as civil as possible and recommends honesty, respectfulness, and avoiding hidden agendas. She often uses an example from Catholic parlance to make her point. “You are entering purgatory. It is your choice. You can drag yourself to Hell or, if you want a peaceful transition, you can ask for grace and forgiveness as you go through this process.” When someone asks her if they should “hire a bulldog attorney,” she said that people must decide what they want. “Do you want peaceful or expensive?” Bulldogs can be expensive in her experience.
While going through a divorce can be a heart-wrenching experience, the stress can be lowered if you spend some time thinking through the financial aspects of the process. Along with hiring a good counselor to navigate the emotional terrain ahead, it is often wise to have a financial advisor with experience in the economic implications of divorce. As you can see, this territory can be filled with landmines and the potential for unexpected challenges. The road can be far less treacherous when walked with experienced counselors at your side.
Dew, J., Britt, S., & Huston, S. (2012). Examining the relationship between financial issues and divorce. Family Relations, 61(4), 615–628.
Francis, S. (2012). What does a divorce financial planner bring to the table? Journal of Financial Planning, 25(7), 15–17.
Silver Divorce: Retirement Income Planning for Late Life Divorcees. (2021, January 28). https://www.theamericancollege.edu/news-center/silver-divorce-retirement-income-planning-for-late-life-divorcees.
Lindsay Tigar | December 3. (2019, December 4). Divorcing? How to Financially Protect Yourself When The S**t Hits The Fan. HerMoney. https://www.hermoney.com/connect/marriage/how-to-financially-protect-yourself-in-a-divorce/.
ChFC®. The American College of Financial Services. (2021, January 4). https://www.theamericancollege.edu/designations-degrees/ChFC.
Social Security. The United States Social Security Administration. http://www.ssa.gov/.
*Advisory services offered through Paul Winkler, Inc. (‘PWI’), an investment advisor registered with the State of Tennessee. PWI does not provide tax or legal advice: please consult your tax or legal advisor regarding your particular situation. This information is provided for informational purposes only and should not be construed to be a solicitation for the purchase of sale of any securities. Information we provide on our website, and in our publications and social media, does not constitute a solicitation or offer to sell securities or investment advisory services, or a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.