The old saying about love is that “the heart wants what the heart wants.” When the heart wants a divorce, it can feel like your world is turning upside down. While divorces are gut-wrenching emotionally, the financial implications can be equally devastating. If you are thinking about a divorce, here are some key considerations about how this may impact you financially. If you’ve gone through a divorce, here are some steps to help you rebuild financially.
A while back I was having a conversation with a religious leader who counsels people who are considering a divorce. He tells me there are three times when couples tend to divorce:
- Year two when they discover they cannot get along.
- Empty nesters who stayed together for the kids.
- Retirees who suddenly now spend way too much time together.
He told me that he’s seeing a spike in retiree divorces. Apparently, when bridge clubs and baseball games and a six pack end up in the same living room – trouble ensues. I’ve also noticed that some of my retirement aged clients are thinking about or have divorced. The big challenge with divorces between people in or near retirement is that there is usually more to lose and less time to recover. So if you have not yet divorced, I encourage you to carefully consider the points below.
This too shall pass – but at what price?
Couples who are considering a divorce are in crisis. It’s important to recognize this because all crises will eventually pass. More importantly, most people don’t make the best decisions when they are in crisis mode. So please carefully consider the choices you are about to make.
Here are some financial realities you should acknowledge before signing the divorce papers:
- You may never recover financially to where you were before the divorce.
- You may never recover the lifestyle you had before the divorce. Are you prepared to live with fewer luxuries?
- Many divorces among retirement aged individuals are from long-term marriages where prenuptial agreements were not in place. This probably means that 50% of your net worth will go to your divorced partner.
- You may have to relinquish one half of your pension plan and/or your 401(k) plan to your spouse.
- You may have to pay alimony to your former spouse and usually this will be funded from your existing cash-flows. So be prepared to budget an alimony payment into your annual financial plan.
These are likely the direct and immediate financial consequences of divorce. But the financial implications do not end there. Here are several additional considerations:
- Some of your retirement savings will likely be needed to acquire a second home, if your spouse retains your current home.
- The second home will need to be maintained and these expenses can add up quickly.
- If you re-marry, carefully consider how much you may need to support a second spouse or partner.
The implications of losing half your net worth while in or near retirement are daunting. So I recommend that you go into this decision with your eyes open and with a real financial plan. How will you replace that lost wealth? Will you have to go back to work or keep working another 10 years?
In addition to the financial losses as a direct result of the divorce, there are other considerations that may affect your financial situation:
- How will the divorce impact your standing with your children?
- What does this mean for your estate plan and will?
- Will you have less money to donate to your favorite charities?
- Will the divorce impact grandchildren’s college funds?
It’s important to recognize the impact of divorce on the entire milieu of relationships that surround your marriage. Sometimes you’ll never know who was your friend, rather than your spouse’s friend, until after a divorce. One thing is for certain – most of your relationships will change after a divorce. Are you prepared for this?
Before you divorce, there are two important questions to ask yourself:
- Will you truly be happier after a divorce? People in crisis tend to focus on their current misery and forget about happier times. Do you have a “happiness plan” for after the divorce? If you are willing to undergo such a huge negative financial hit, will it be worth it?
- Will counseling work? If you married a spouse and stayed with them for many years, clearly there was love at some point. Can you get back to that feeling of love? Six months or a year of counseling are a lot less expensive than a divorce.
If you say “yes” to the first question and “no” to the second, all the while recognizing the financial implications, then a divorce may be the only way forward.
Steps to rebuild after a divorce
Once a divorce has happened, it can be very difficult to recover financially – but not impossible. Here are several steps you can take the re-build financially after a divorce.
First, set realistic goals about the amount of wealth you want to accumulate. If it took you 30 working years to build the nest-egg you split with your divorced spouse, is it really reasonable to believe you can re-build to that level within 5 years?
Second, find a good financial planner who can help you accurately assess where you are now and what steps you need to take to re-build. Now more than ever you need a good financial planner because you have fewer years to recover if you make poor choices. Young people can make poor financial choices and recover a few years later. You may not have this opportunity.
Third, make the tough choices. To re-build financially, you’ll likely have to do it the same way you built wealth the first time. For most people, this comes in one or more of three ways:
- Increase income.
- Save more and spend less.
- Work longer by deferring retirement.
Depending on your goals and your situation, any or all three of these may need to be put in play.
Fourth, you’ll want to max-out all of your tax-deferred investment options: 401k, profit sharing, pension plans, etc. Anything you can do to defer taxes until after retirement, when you may be in a lower income tax bracket, will definitely help your recovery.
Fifth, your investment plan will likely need to be overhauled given your age, risk tolerance and wealth creation goals. Smart wealth created through investments requires a maturation period. Your investment choices, now more than ever, need to be aligned with your life goals.
Sixth, if you are pondering a new marriage, carefully consider a prenuptial agreement. A second divorce could put you in a position where you never recover financially.
No matter where you are in your relationship with a spouse, you cannot separate love and money. They are forever intertwined. If you are retirement aged, please consider carefully the choices you make because the implications are long-term. You may get a second shot at love. But you may not get a second shot at building the kind of wealth you had in the past.
Whitnell is not a law firm and does not give legal advice. The information contained herein should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents of this article are intended for general information purposes only, and you are urged to consult a lawyer concerning your own situation and any specific legal questions you may have.