Ready to Call It Quits With Your Spouse?
Make sure you understand the financial realities of divorce.
You may feel 110% ready to divorce, but have you considered the financial implications of splitting up?
"When people are thinking about divorce, many are just ready to get out at any cost. That is exactly the wrong attitude to have. You have to plan carefully," says June Walbert, a CERTIFIED FINANCIAL PLANNER™ practitioner with USAA. "In virtually every divorce, there is a major lifestyle change. You have to keep in mind the financial ramifications for today as well as for decades to come."
Dollars and Divorce
The good news is that many people seem to grasp the connection between their bank accounts and their marital status. Among the 44 states that collect divorce stats, divorce rates dropped by 5% between 2006 and 2009 -- just when the economy was at its worst, according to the Centers for Disease Control and Prevention. In fact, 38% of those who responded to a survey by the National Marriage Project at the University of Virginia who were considering separation or divorce said the recession caused them to put aside their plans. However, law firms nationwide are reporting a recent surge of business, as couples feel more confident that the improving economy can more easily sustain two households.
"The economy affects whether people can afford to divorce. It affects what you do with the house, a family business, child support and alimony," says Linda Lea M. Viken, president of the American Academy of Matrimonial Lawyers and a Rapid City, S.D., family law attorney with more than 30 years of experience. "If people don't have money, they can't even afford appraisers or lawyers. When considering divorce, you have to take off your emotional hat and put on your business hat because you're making business decisions."
Even if the recovering economy has boosted your confidence in your ability to afford divorce, make sure you have a clear picture of your financial reality.
Make a Budget
Before you divorce, sit down with a paper, pen and calculator to figure out how you will pay for everything, Walbert says. A divorced couple will suddenly have two households to maintain financially and two retirement accounts to fund.
"When going through a divorce you need to know how the numbers shake out, so know what you can afford and what you can't," she says. "The numbers don't lie."
Even if one party earns the bulk of the income, it is unlikely that person will walk away with the bulk of the monthly income or assets. Keep in mind, however, that in many states a great deal of discretion is left to the judge or courts. If children are involved, child support and even spousal maintenance often are awarded, making the keeping of the proverbial lights on in two homes a question mark for both parties.
Even if you calculate your current income and expenses down to the nickel, you probably still don't have an accurate picture of what your checkbook will look like after a divorce. Divorced couples lose out on the tax benefits of filing jointly, and only one person will have the tax advantage of filing as head of household if awarded primary custody of the kids. Child tax credits, child care deductions, and the family home's interest and property taxes likely will be declared by just one of the parties -- assuming the couple's house was not sold. "It's a big difference whether you have those deductions or not," Viken says.
Further, make sure to tidy up past years' filings before calculating your new bottom line. There is nothing worse than finding out too late that a dishonest spouse lied about paying or filing previous taxes -- or worse, cheated on the filings. Remember, you will be liable for any tax obligations incurred during the marriage.
Bottom line: There's a good chance that at least one party will be paying more taxes, which slashes take-home pay for everyone. And that further squeezes what is likely a tight financial situation.
Retirement -- Your Future Now
"Even if you're in your 30s or 40s, you must consider the impact that a divorce today will have on your retirement in decades to come," says Walbert. In many cases, retirement funds amassed during a marriage are split 50-50 -- no matter who earned the money. A spouse's military retirement paycheck or corporate pension may also be considered part of the settlement. Likewise, when couples have been married at least 10 years, the poorer spouse is eligible for up to 50% of the ex-spouse's Social Security benefits at age 62, if greater than his or her own.
That said, use an online calculator to figure out how far these divvied-up retirement assets will help each of you in retirement, and what earning potential you and your spouse have between now and then. Chances are both parties will have to save more and work longer than originally planned.