By Aviva Pinto, CDFA™, Director, Bronfman E.L. Rothschild
Divorce is a reality for a growing number of aging couples, a phenomenon commonly referred to as “gray divorce”. According to a 2013 study at Bowling Green State University, the divorce rate among adults ages 50 and older doubled between 1990 and 2010. Now, one in four Americans getting divorced is 50 or older.
Divorces among couples in this age group may have significant assets at stake. At the same time, it is not unusual for one spouse to have a lack of in-depth knowledge about the family’s finances. In those circumstances, the non-moneyed spouse may not be aware of what a fair settlement should be.
Regardless of whether you handled financial decisions during marriage, it’s critical to do whatever it takes to put emotion on hold when facing divorce. You’ll need to focus on your future and set financial goals, as these decisions will likely affect the rest of your life. Unfortunately, there is no “do-over” in divorce and you will need to focus on the money during this painful process.
Financial mistakes related to divorce settlements are common and often rooted in not realizing the consequences of a decision that seemed to make sense at the time. These mistakes can happen when decisions are made emotionally, not taking into account the ramifications from a financial standpoint.
As an example, you might be tempted by an offer to keep your family home. You need to keep in mind that the real value of that home after the mortgage balance could be far less than its assessed value. A home with a market value of $3 million but with a mortgage of $2 million is really only worth $1 million to you. In addition, if you keep the home, you will need to consider whether you can afford to maintain it over time, factoring in the mortgage payments, taxes, and other carrying costs.
Alternatively, if you have decided to find a new place to live, you need to carefully consider whether your income and/or your settlement will be enough to maintain your desired lifestyle in that new location.
3 Financial Mistakes to Avoid Before and During Divorce
In addition to the example above, the following are three financial mistakes to avoid if you are contemplating or going through a divorce.
1. Underestimating your living expenses
Most people know how much they are paid, but often times don’t know exactly where their money goes each month. For those who are not employed and/or are not involved in financial decisions for the household, the problem is often amplified. Knowing how much you need to maintain your lifestyle will be crucial to negotiating the terms of your divorce settlement.
Be sure to consider such expenses as health insurance, which you might have had through your spouse’s work and may need to purchase independently post-divorce. When detailing expenses into the future, it is important to also take inflation into account. What something costs today (for example, college education) could be much more expensive in the future.
2. Retaining illiquid assets
In most divorces, one spouse keeps the primary residence and the other might get a corresponding amount in cash, retirement accounts, or other assets. A similar process can be used when a spouse or couple owns a business or significant investment portfolio. Although the split might be equal on paper at the time of the divorce, one spouse can be left with an asset (a house or business) that could be difficult to sell. In addition, if a divorce settlement drags on for months or years, your financial situation can suffer until you are able to get access to those assets.
3. Failure to consider taxes
Be careful to consider the implications of taxes on your divorce settlement. Keep in mind that you will be taxed on any alimony that you receive.
You should also be aware of the taxes and penalties assessed on distributions from retirement assets. If you receive a portion of a retirement account as part of a Qualified Domestic Relations Order(QDRO), you will be subject to a 20% withholding tax if you fail to roll that retirement money directly into an IRA or other retirement account. You must also have a QDRO in place to avoid an additional 10% penalty on distributions taken before age 59 ½. A QDRO details how you and your spouse will split qualified retirement accounts such as 401(k) or pension accounts.
You will also need to consider capital gains taxes on any appreciated assets. This could include selling a home that has appreciated significantly or an investment portfolio with stocks that were purchased at a much lower dollar amount than what they are worth today. Although liquid and easy to sell, highly appreciated investment assets may have significant future tax liabilities due to capital gains and have a much lower actual after-tax worth to you.
Before going down this scary road alone, it is best to consult with a wealth manager who can help you navigate your financial future. Even those with little or no financial experience can become financially savvy by asking the right questions and seeking help from professionals such as attorneys or financial advisors who specialize in divorce. Many choose to work with a Certified Divorce Financial Analyst® (CDFA™) throughout the process.
AVIVA PINTO, CDFA™, Director Highline Wealth Management
Aviva Pinto is in charge of portfolio management and client services at Highline Wealth Management in New York. She has been in the business for over 25 years and works with divorcing clients to help them feel more secure about their financial future.
