Many divorce clients say, in their first meeting with me, that they believe their divorce was in the making for years before they went ahead with it. Yet, armed with that possibility, very few people prepare for the financial consequences of divorce.
Finances after divorce
For most families, the financial realities of divorce are surprising, and not pretty. Supporting two households instead of one, paying legal fees, and dividing assets mean both spouses may experience a financial pinch. Another factor is the law entitling the less moneyed spouse to the same standard of living the couple enjoyed during their marriage. This protects spouses who stay at home from being left without an income after a divorce. (Even so, a government study found that, for couples over age 50, women’s household income fell by 41% following a divorce or separation, while men’s household income dropped by only 23%.) If your standard of living while married is extravagant, maintaining it in two households may be hard.
If you are the major breadwinner and your spouse is not working, prudent spending and careful saving are very important to your future finances. The breadwinner will likely pay significant spousal and child support if you do separate and divorce. So don’t spend financial resources on high end cars, expensive vacations, or major redecorating of your home. Do build up your financial savings. Do revisit your life insurance profile. Do make careful, not reckless investments.
Preparing for divorce while happily married
Some say preparing for a divorce while you are happily married is cynical, and could cause a couple to consider divorce more seriously than if they hadn’t prepared for it. But such planning will be helpful even if you stay married. Even with spousal and child support, spouses who don’t work are at risk financially if they get divorced. How many years spousal support lasts depends on the length of the marriage; long-term marriages result in spousal support that lasts longer than short-term ones. One way for a single-income family to prepare for divorce is to build up a savings or retirement account for the stay-at-home spouse. This encourages the couple to save wisely, and is helpful if the breadwinner becomes disabled or suddenly passes away. If the couple doesn’t divorce, it increases their financial security for a future together.
Financial benefits of mediation and collaborative divorce
In mediation and collaborative divorce, the focus is meeting both spouse’s needs–in other words, making sure each spouse has enough income to live on after a divorce. Litigation may waste your legal fees in this respect. Early on in a divorce, each spouse creates a budget listing monthly expenses, along with assets and debts. Their attorneys negotiate spousal and child support based on their total income, finances, and how much they need each month to pay their bills. In litigation, the couple becomes adversaries competing for their shares of the pie, and it may be tempting to inflate your budget initially to get a better outcome. Mediation and collaborative divorce emphasize working together to fit both budgets into their total financial resources.
Complicated financial assets may require the help of financial analyst who specializes in divorce. In litigation, each spouse might hire a financial professional, but in collaborative divorce, any financial analyst must be a neutral professional who works with both spouses. The financial analyst looks at the couple’s total income and assets, including property and retirement accounts, to recommend a plan that makes the most of what they have. Taxes are an important part of the financial analysis. It may make sense, for example, for a spouse with much lower income than the other to claim the $2,000 deduction for each dependent child. The deduction could be traded for a slightly lower spousal support payment, so both spouses benefit.
How to survive a divorce financially
I’ve had many clients say they regret living for the moment, financially, in the years before they separated or divorced. When you have enough income, it is tempting to purchase expensive electronics and recreational items or eat out several nights a week. No one wants to continually tighten the belt when divorce isn’t really on the agenda. But so many clients who find themselves on the cusp of divorce wish that they had saved more money, spent less on consumer goods, and lived in an affordable home.
Avoid the regret. Spend less and save for the future.
Copyright 2019 by Kelly & Knaplund
Image © Marcos Calvo Mesa