Divorces can be both mentally and financially difficult. But there are things you can do to stay above water and keep yourself afloat. Here’s our guide to how to survive financially after a divorce.
Expect Your Financial Situation To Worsen For A Few Years After Your Divorce
More often than not, the standard of living of both spouses drops in the first few years after a divorce. Why? Because the same cumulative income and pool of assets now have to support two households instead of one. Unfortunately, most people don’t prepare themselves financially or emotionally for that consequence.
After a divorce, you should develop a budget based on your needs – not wants – and keep in mind that your expenses need to stay within your post-divorce income. Consider all sources of income – including spousal and child support, keeping in mind that they won’t last forever – as well as investment income.
For people who’ve relied on their spouse to handle all the bill-paying and monetary decisions, a divorce is even more overwhelming. In addition to their new financial responsibilities, they are also likely dealing with decreased income, debt problems they didn’t know existed and the expense of setting up a new household. In fact, a new study by the Government Accountability Office reports that divorce results in a 41-percent reduction in household income for women and a 23-percent reduction for men. So being financially diligent is absolutely essential in this transition time.
Know What You Have
Account statements have a way of disappearing when divorce proceedings start. When contemplating divorce, start by collecting statements for all your financial holdings and put together a list of your assets. When negotiating your divorce settlement, this step will prove helpful as a starting point. Here’s an example of items you’ll need to list on an Asset Worksheet. Remember to note the value of each asset, and who owns what portion of it:
- Retirement Assets
- Liquid Assets
- Real Estate
- Personal Property
- Cash Value Life Insurance
- Business Interests
As you work your way through the asset split negotiations, each asset can be moved to its appropriate column: “Husband” or “Wife”. To figure out the percentage split, divide the total for each spouse by the grand total.
Don’t Forget About Your Pension
Any portion of a pension that was earned during the marriage should be included in the marital pool of assets. Pensions can be handled in three different ways:
- The non-employee spouse can receive his or her share of a future benefit;
- The pension can be present valued and offset;
- A combination of (1) and (2).
Your particular situation should determine which option makes the most sense for you. For example, a 32-year-old wife with two young children and limited resources will have different needs than a 55-year-old wife with a career and her own pension. Make sure you’re not the divorcee who has a great pension that will pay in 15 years and have no money to pay the bills today.
Consider The After-Tax Values Of Your Assets
Accounts with pre-tax contributions and tax-deferred growth come with a tax liability. Know what the after-tax equivalent value is before agreeing to take an asset. Having $100,000 in an IRA or RRSP is not the same as having a $100,000 in a checking account. The spouse with the retirement savings plan will end up with the account value minus the tax liability, and the other spouse will have the whole amount to spend.