Dealing With Divorce—Taking the First Financial Steps February 19, 2020 Adviser Fund Update Print The Adviser You Can Talk To Podcast: Strategic Retirement Planning You’ve heard the names: Traditional IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age., Roth IRA, 401(k), brokerage account, health savings account. But which is the right one for you and your retirement plan? In this lively conversation, Vice President Rick Winters and Senior Financial Planner Andrew Busa discuss strategic ways to think about how to invest for your post-work goals. Topics include: The power of tax-deferred investing and compounding Roth IRAs vs. traditional IRAs The triple-tax-advantaged benefits of health savings accounts Maximizing your contributions without neglecting current budget needs The “backdoor” Roth and why not to go it alone It’s never too soon to know more about investing for retirement. To learn more, listen to the podcast by clicking here now! Dealing With Divorce—Taking the First Financial Steps Divorce is a crossroad that no one sets out to reach, but nearly half of all married couples in the U.S. face it during their lifetimes. Whether it ends up being a wakeup call or a relief, when you get to the point where divorce is inevitable, it can be overwhelming. How do you split a shared life in two? Separating can be particularly challenging for people who do it later in life. While the overall divorce rate has fallen due to people waiting longer to marry, the number of “gray divorces” involving people aged 55 to 64 tripled between 1990 and 2017. Gray divorces present unique challenges. Longer marriages mean more time to accumulate assets, many of which can be difficult to untangle and divide. You’re closer to or have already begun your retirement years, and you may find it daunting to adapt to the different standard of living that typically comes with divorce, especially if it happens around retirement. However the decision to divorce has been reached and whatever your outlook, the silver lining is that you don’t have to go it alone. Countless well-meaning and experienced professionals are available to help you every step of the way. This is a complicated subject, so our focus today will be on some of the practical, finance-related steps to take once you know you will be getting a divorce. We’ll address considerations for once divorce proceedings have been opened and how to plan for life after your marriage ends in future Adviser Fund Updates. Document All Current Expenses As soon as you see divorce on the horizon, it pays to start keeping track of your household income and expenses. This is information you can use to create a post-divorce budget, and it will also come in handy for your lawyer and, eventually, the judge who’ll be determining how to fairly divvy up assets and debts, as well as any child or spousal support payments. This means writing down all household costs, including food, mortgage or rent, clothing, entertainment, transportation, childcare… anything you’re predictably spending money on. You can also use bank and credit card statements as a historical guide to your spending. On top of that, try to think about near-term expenses that aren’t necessarily planned for, but seem to always come up, like getting your refrigerator fixed or getting your car back on the road after a breakdown. Document collection is tedious, but critical if you want to have an accurate understanding of your finances—start as soon as you’re able to; your lawyer and financial planner will thank you. To start, you’ll want to gather: Recent account statements: Checking and savings Retirement Investments Loan ledgers, including mortgage, auto and personal loans Insurance policy statements Credit card statements Pay stubs List of assets List of debts (more on this below) Three years of income tax returns (at least) You’re legally permitted to these statements when they are under your name or jointly held—hopefully gathering them is straightforward, but in some situations, it may require legal action to gain access. Dividing Property Determining who will get what is usually one of the first concerns for divorcing couples. This means everything from furniture to family heirlooms to investments to your homes, cars and even power tools. Sometimes things are just things, but often there are emotional attachments in addition to inherent financial value. The house is often the most valuable asset owned jointly by a couple. So how do you go about dividing it fairly? First, it needs to be appraised. Each spouse may wish to hire their own appraiser and take the average of the two results, or you can save some money and just hire one. Houses can be especially difficult to negotiate given the memories involved. And there are important tax considerations to keep in mind, which we’ll address in an upcoming piece. This is one of many reasons why it’s usually worth having a lawyer’s assistance. If you haven’t accumulated too much stuff together or are on good enough terms and believe you have the emotional capacity to handle divvying up your possessions and assets without representation or arbitration, you may be okay without one. But most people will benefit from hiring an objective third party or their own advocate to help sort things out and refine a list of priorities that protects their interests. Either way, to form a basis for reasonably deciding who will keep what, you’ll want to know what’s at stake in terms of property, money and debts. Gathering the documents we listed above will help, but you will also want to create a master list of everything you acquired over the course of the marriage, the cost of the items (and what they’re worth now) and when you bought them to begin figuring out the “stuff” piece. Unless an item was purchased with clearly delineated non-joint funds, it belongs to both of you. Next, identify the items whose ownership is reasonably clear cut and divide the value. If he loves to cook but needs hired help to change a lightbulb, and she installed a bathroom in the basement but eats out for every meal, it may be easier to give him the kitchen appliances and her the power tools. For other people, they just want a clean break—every towel and trivet carries unpleasant memories. They can get their partner to pay them cash if the value of kept possessions is uneven and use it to start fresh. Where you live can also have bearing on this determination, particularly if you are working with lawyers or arbitrators. There are currently nine states—AZ, CA, ID, LA, NV, NM, TX, WA and WI—that follow “community property” law, wherein all assets acquired during the marriage by either person are classified as joint marital assets to be divided equally upon divorce. In most other cases, there’s some negotiating and bartering involved, typically handled by mediators or arbitrators. Alternately, all property may be sold, with the proceeds divided equally. (There are special provisions for retirement account assets, we’ll discuss how those are split next time.) The factors a court considers when weighing the division of possessions and assets vary quite a bit, but they usually include the length of the marriage, each partner’s responsibilities, the size of the property, whether children are involved (and who will have primary custody), both spouses’ health and noneconomic contributions to the union. The typical rule of thumb: The longer the marriage was, the more likely that assets will be split 50/50. Till Debts Do Us Part Divvying up what you own is only part of the financial picture. You’ll also need to tally up everything you and your soon-to-be ex owe as well. Even if the divorce is an amicable one and you trust your spouse, it’s worth ordering a credit report from each of the three credit reporting agencies: TransUnion, Experian and Equifax. This will break down everything you owe individually as well as jointly. Avoiding the creation of additional debt during the divorce process will make life easier for both of you—canceling joint credit cards can help. (It’s okay to keep one in your own name in case you need it.) The minor hit your credit score might take for opening a new credit card in your own name is worth it to avoid accumulating any joint debt you may be held liable for. To split up debts, you have to assign who’s responsible for what. As with many aspects of divorce, the best approach depends on the situation. If you agree to split debts equally, you are still vulnerable to the riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. of your ex not following through, and you’re responsible for their share, even if they’ve signed an agreement stating otherwise. You can also make the value of property you’ve agreed to split part of the formula; one person can assume more debt responsibility in exchange for more of your shared items, or vice versa. While it’s not possible for everyone, the ideal solution is to pay off debts now. Don’t forget, even if your ex ends up with the house and is expected to pay the mortgage on the property, if both of your names are listed on the paperwork, you are both still obligated to pay that debt… a divorce decree doesn’t terminate what you owe to the mortgage lender. Having an existing mortgage can also make it more difficult to qualify for a new mortgage. Retaining the original mortgage means a lot of risk. What are the other options? If selling the house isn’t in the cards, a common solution is for one spouse to keep the house and refinance it in their own name only. If the divorce isn’t official yet and your spouse will keep the house, you’ll want to include language in the divorce decree requiring your ex to refinance. Another option: One spouse keeps the home and assumes the existing mortgage, but not all mortgages are assumable; you’ll need to make sure your mortgage lender will allow it. If so, the spouse who’s assuming the loan will need to complete a release of liabilityLiabilities are calculated by adding up your existing debts (mortgage, car loans, student loans, credit cards, etc.). and present documentation that demonstrates the ability to meet the loan based on one income. What Not to Do Divorce can be bitter and people are not at their best during the stress of a crumbling relationship, but acting out of spite in the heat of the moment can do you long-term financial harm. It may be tempting to squirrel money away or liquidate assets in an attempt to hide them from the other side. This will likely backfire—experienced divorce attorneys know how to track the money down; there’s always a paper trail. Your credibility and that of your lawyer are the number one factor in any divorce, doing anything that could be perceived as underhanded can hurt your case. Since dividing joint assets is difficult and can be adversarial, it’s better not to change your spending habits, in particular by making large purchases or transfers, just before or during the divorce process. It’s a time to be financially conservative, and if you’re worried that your spouse isn’t on the same page, your lawyer can move for a legal separation that lays out how money is supposed to be spent until the divorce is finalized. Remember, making the best financial choices for both parties will help you in the long run. 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