Divorce 101: Protect Yourself

By Jennifer Johnson

Researchers estimate divorcing individuals would need more than a 30% increase in income, on average, to maintain the same standard of living they had prior to their divorce. Most men experience a loss in their standard of living in the years after a divorce, as well, a loss generally about 10%–40%, depending on circumstances but for women the result is often even more devastating.  Generally, women suffer more from financial losses than men because of unequal wages for men and women and because women usually have more expenses associated with the physical custody of children after divorce. Most children—five out of six—live with their mothers after a divorce, so the financial scars of divorce are left not just on  women but also on their children.

As a result, about one in five women fall into poverty as a result of divorce.1 The divorce process takes approximately 1 year to complete. During that year, you will make decisions that will impact the rest of your life and the lives of your children (should you have any).  Here are some critical things to consider when you make those decisions:

1. Don’t go at it alone!  Divorce affects all areas of your financial lives and not just legal issues.  You will need advice on insurance, planning your financial affairs as a single person and taxes for example.  Create a team of professionals with experience helping individuals going through divorces.

2. Get your fair share now – BUT don’t forget about the future value.  Many women will want to keep the martial home and as a result may take less of investment and retirement accounts.  Normally, we would expect real estate to appreciate at a lower rate than stocks for example.  In addition, a home requires maintenance, taxes, and may be too big for the new family structure.  Before accepting most of your share of martial assets in a home value, have someone help you look into the future to see what your net worth will look like down the road.

3. Family Businesses are sometimes challenging especially if the husband ran the business while the wife stayed at home or worked elsewhere.  Even in those cases, the wife’s family contribution allowed that business to be created and hopefully grow. Make sure to let your attorney know all of the circumstances and get a professional value on the business.

4. Retirement accounts and pensions have unique issues. Normally a document called a Qualified Domestic Relations Order will be required to divide those between spouses.  There are important tax considerations about withdrawals from retirement accounts and differences between qualified plans (like 401(k)s) and individual retirement accounts (like IRAs). Make sure to understand the differences and how a withdrawal will be treated especially if you will need to take distributions before your age 59 ½. 

5. You may still need insurance on your spouse.  Often people cancel insurance on a spouse after a divorce but what happens if you are depending upon a person for alimony or child support and that person becomes disabled or dies? Talk to your attorney and insurance advisor about minimizing risk here.

6. Social Security benefits may still be in the cards.  Even an ex-spouse may be entitled to a spousal benefit IF:  (1) You are at least age 62 (2) you were married for at least 10 years and (3) your ex-spouse is entitled to a benefit.

7. Find a good accountant.  Your tax situation will change after your divorce.  Even if you have typically done your own taxes, for at least the first year after your divorce it is likely a good idea to get some tax help. 

Divorce is a huge challenge and is becoming increasingly common. Decisions made during the divorce process will affect yourself & your loved ones for many years down the road. Luckily, there are planning opportunities that can craft a better outcome for all involved. Those opportunities come best out of a collaborative relationship between the attorney, financial planner, insurance advisor & tax advisor. If you are going through a divorce and have questions or need guidance, feel free to contact me directly at jjohnson@bluerockwm.com or visit our website www.bluerockwealthmanagement.com to learn more.

1 Source:  What are the possible financial consequences of divorce?  By Drs. Linda J. Waite & Maggie Gallagher, noted marriage researchers.

Jennifer Johnson is a Partner & Certified Financial PlannerTM with Blue Rock Wealth Management located at 524 North Trade St. Winston-Salem, NC 27101. More info available at www.bluerockwealthmanagement.com or by calling (336) 723-1220.

Advisory Services are offered through Blue Rock Wealth Management. Securities offered through Cetera Advisor Networks LLC, member FINRA/SIPC.  Cetera Advisor Networks & Blue Rock Wealth Management are unaffiliated