Financial Planning in the Divorce Process

By Thaddeus Allen, CFP® & Barry Whittle | Jul 29, 2023 |

Divorce doesn’t tend to bring out the best in people. Whether you are the initiator, or the person reacting to the change in real-time, most of us can’t show the strongest version of ourselves during this life-changing event.

Everyone wants to come out the other side of divorce feeling better than when they came in — and that’s not a given.

You need a plan, not a hope for good vibes. That includes a financial plan.

Maintaining your standard of living

Many people, either on the cusp or in the middle of a divorce, worry about their ability to maintain their current lifestyle. This often includes those who haven’t been the primary money manager of the family as well as those who have financially complex, busy lives.

Splitting your shared assets will define how well you can maintain your lifestyle. Assets have long-term financial impacts, so it’s imperative to think and plan beyond the short-term implications such as, “Who gets more cash on hand?”. Cash is good, for sure. However, there is a difference between the value of an asset when dividing a shared resource and its value once it’s liquidated.

Consider the growth and expected growth of certain assets (e.g., real estate), the tax ramifications — both positive and negative — of taking money out of retirement accounts or getting to write-off mortgage interest, and a sustainable long-term plan for social security benefits and pensions.

To maintain your current lifestyle, here are the five key financial planning considerations we advise on during a divorce.

#1 Consult a financial advisor early in the process

A good financial advisor will meet you on a human level. A trusted expert delivers objective advice during this emotionally charged time. You’ll want an emotionally-intelligent advisor to partner with through the divorce process. They need to show, and you need to sense, that they have your best interests at heart.

A fiduciary financial advisor is legally obligated to serve your best interests — the type of finance professional you want to work with.

But it would help if you had more than an obligation. You want someone on your team who can help you understand and map out why a split is, or isn’t, equitable and help you advocate for your financial future by understanding the current and long-term value of assets mapped over time.

Additionally, they should earmark the ones you should touch first, second, and third after the divorce so that you can enter a post-marriage glide path that minimizes taxes and extends the life of your assets.

The typical industry map would start with non-retirement assets, then traditional qualified assets (401(k)/IRA), then keep Roth assets for legacy planning and an additional lever to pull in periods of high financial need that won’t drive up taxes during retirement.

In reality, you may need something more nuanced than that.

A good financial advisor will help define how you will utilize your assets post-divorce, keeping in mind how to navigate future taxes, healthcare costs, and family/charitable giving throughout your lifetime.

#2 Know the five key numbers to underpin your financial plan

When you think about the key numbers that give you financial confidence, consider your ideal budget but don’t lose track of reality.

A good financial planner will give your budget the sniff test and point out what you perhaps haven’t considered, from health care to life insurance, spousal support to elderly care. When people think of “bills,” they often default to their phones and utilities. Your plan needs to look more broadly. A good financial planner will bring in bigger life commitments.

To understand your financial plan, you must understand the liquidity of your assets. (Liquidity measures how easy it is to convert assets to cash.) There are assets you can pull from quickly and assets you can pull from over time but are costly (e.g., equity in your home). You can pull money from your 401K today, but that will incur income taxes and a 10% penalty if you do so before you are 59 and a half; Stock options and brokerage/bank accounts are easier to access and can have a lower tax burden.

Divorcing couples must find an equitable way to split liquid and illiquid assets. If one person wants to keep the house, the other needs to be kept whole in value by getting more in retirement or bank accounts.

#3 Insure your future support

If there are spousal or child support needs, life insurance policies can be required to fulfill those requirements should something happen to you. Working with a Personal CFO enables you to understand the type of policy you need, help shop those policies to the correct brokers, and ensure you are paying a fair price.

A Personal CFO using evidence-based investment strategies will help you accomplish your long-term financial goals in various market cycles. They aren’t swayed by what’s up or hot right now. Instead, they use a proven strategy to get from points A to B. They’ll throw cold water on the urge to sell when markets drop and resist the urge to hitch a ride on a bandwagon stock.

A true financial advisor injects discipline when the markets are scary, or investors get greedy.

#4 Understand the all-in costs and timeline for the divorce process

The costs of a financial settlement depend on how messy the divorce process gets. Remaining amicable and working out the details through mediation has a different price tag than involving lawyers. Even if it’s agreeable, professional costs are still associated with, for example, having a realtor put a house on the market.

There are also costs around child and spousal support and insurance contracts. These are often less contentious as most states have formulas to calculate the appropriate level of support.

There are also other areas you may be paying less attention to. There is a high cost to future liquidity. Assets you advocate for or receive in the settlement have different taxation implications. (e.g., income tax when money is pulled from retirement accounts, preferential capital gains rates for stocks held long term, and typically non-taxable spousal support if divorced after 2018.)

Additionally, debt that you and your spouse may have taken on or maybe taken on throughout the process will all be classed as family debt and must be stacked against your assets.

#5 Align your new lifestyle with your income stream

Be clear on your lifestyle goals and align your assets with those goals—part of that means living within your means. You are shooting for peace of mind. When your head hits the pillow, you don’t want to worry about what’s going on in your 401(k), what you inherited, or what you gave away.

While it can be comforting to maintain a pre-divorce lifestyle that feels familiar, you don’t want to do so at the expense of your future well-being.

Divorce is one of the most stressful, emotionally charged acts of adulthood. No one should be looking to “win” or “lose” in a divorce. You both want to flourish in the next stage of your lives, and an equitable financial plan underpins that.

We’d love to hear from you whether you have a specific question about financial planning during a divorce or want to learn more about how our approach can be tailored to your situation.


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