AdviseHer: Dealing With Divorce—How to Financially Survive (and Thrive)

Statistics show that 50% of marriages end in divorce. Many of the questions we hear from clients going through this process were around budgeting, asset types and financial planning. We’ll dig into all of these on this episode of AdviseHer.

Dina Milne:
Hi and welcome to AdviseHer a special episode of The Adviser You Can Talk To Podcast. Here at Adviser Investments we’ve noticed that when it comes to managing money and planning your financial future, there are some issues that impact women differently. With that in mind, we wanted to use this podcast to dive deeper into specific financial topics, providing some practical tips on how to handle them. Today, we’ll be discussing the many financial considerations related to a divorce. This is one of the largest financial events that any individual could experience in their lifetime and so understanding your financial picture and receiving the right advice can help you navigate through this difficult process.

Dina Milne:
I’m Dina Milne, an account executive. I work directly with clients and have helped some of them navigate through a divorce. I’ve seen some very common themes arise and I wanted to share them with our listeners. Joining me today is Kate Austin, an equity research analyst and co-founder of our women’s initiative here at AI.

Kate Austin:
Hey Dina, thanks so much for having me today. I’m really passionate about this topic. I grew up in California where it was not uncommon to have people have first, second, third, sometimes even fourth marriages and I saw a lot of friends of mine and families that were close to my family really have irreparable harm done from a lack of financial planning pre-, during and post-divorce.

Dina Milne:
Well, thank you for joining me, Kate. Also joining us is Diana Linn, a financial planner and part of our financial planning team.

Diana Linn:
Hi Dina. Hi Kate. Thank you for having me as part of the conversation and while I also personally haven’t experienced divorce, my husband and I have been married for almost 10 years, I have watched and coached many friends and clients as a financial planner through the divorce process. Divorce can definitely be stressful and a lengthy process and you may be worried thinking, how am I going to get through this when my entire financial life up until this point has been built with my partner in mind, having the two incomes, joint accounts, possibly home ownership. And while divorce might be scary, as a financial planner, I view this as an opportunity to take control of your financial life by building that solid financial plan.

Kate Austin:
As a research analyst, I always am looking at the numbers. And we all, I think understand that really about 50% of all marriages in the US will end in a divorce, but the divorce rate for those over 55 has actually tripled since 1990. And so if you are getting close to retirement and go through a divorce, it’s even more important to get a financial plan in place because you’re really having two major life events happening very close together.

Diana Linn:
Those statistics still are staggering to me.

Kate Austin:
I know.

Diana Linn:
50% and now 60%.

Dina Milne:
I know. I personally, I would say a third of my clients or a third of my female clients who are over the age of 55 have either gone through a divorce or are going through one. I see it. And Diana, as you said, having a plan in place and understanding your finances is so important. I’d like to just take a step back for a moment and say, this is a really big topic. There is a lot to it. There are the legal ramifications, the family involved, emotional toll, that just names a few of the things that are involved in a divorce.

Dina Milne:
For the purpose of this podcast, we wanted to make it really focused. And so we polled a number of clients, both female and male, and we tried to see what common themes emerge from that. And there were actually three very common themes. How to budget, what do I own? And how do I protect myself and my family? Focusing on those three themes, we’re going to move through the divorce process from the moment that somebody decides that they want to file for divorce and then go through the process and then post-divorce. And as we move through each stage, we’ll discuss some of the key financial considerations that you should have in mind.

Diana Linn:
Right. And as you mentioned, while this information we’re going to be discussing certainly can be applied to everyone, we’re going to really be focusing on the female perspective as these topics and questions were brought up by many of our female clients. In this initial phase, you’ve made the decision to file for divorce. You may have been considering it for years. It might be a mutual decision, or perhaps you’ve been completely blindsided. There are things that you are going to want to do in preparation for this. And a couple of common things you’re going to hear throughout the conversation. Right now you really want to engage your professionals, get everyone on board, on your team. Keep in mind that every state is different and what’s worked for your friend might not work for you if you are living in different states. And plan, plan, plan.

Kate Austin:
Well, and when we say professionals, we mean your financial adviser, maybe an accountant and probably your divorce attorney.

Diana Linn:
Absolutely.

Dina Milne:
Either way, no matter how you get there, you do need to understand what you have. What you own and what you owe. It’s a good idea to start to pull together your accounts, understand what types of accounts you have. Do you have the passwords to those accounts? If not, can you get them? What outstanding loans you have with or without your spouse. Any tax returns, wills, estate plan, jewelry, art appraisals, anything that you own or owe and anything that you may jointly own or owe.

Diana Linn:
Right. Really almost build that net worth statement so you can see everything that the two of you own together, all of your accounts in one place.

Dina Milne:
Yeah. And while you’re in the midst of all this, this may be the first time that you’ve had to deal with this or shown interest in it and that’s okay. But in order to be able to get what you need at the other end of this process, you need to know what you have. And so one of the first things to do after you get your kind of data gathering going, a good first step too is trying to put together a budget. Try and understand what your monthly bills are. Most advisers recommend three months of bills and cash outflows, but Diana, you like 12 right?

Diana Linn:
Yeah, I like to recommend to take a look at your expenses over the course of a full year, a full 12 months. Because there are some annual expenses such as property taxes.

Dina Milne:
Oh that’s a great point.

Diana Linn:
Home insurance, maybe you’re only paying your car insurance once a year, every six months. That might be missed if you’re looking at a shorter time frame. And then one other thing is to get that safety net of the emergency expenses set off to aside too that we would recommend six months for that.

Dina Milne:
Oh that’s a great idea. And obviously budget’s important, but you have to understand what inflows you could have too. What type of income sources do you have? And this is especially important if you’re already retired or you haven’t been working full time.

Kate Austin:
Right, so that impact of income is very important whether you’re working or not working. I have an example regarding an alimony payment. One of our clients, a younger couple, she was a doctor and he was self-employed. He owned his own business, so she had a very regular fixed income that she received every year,  whereas his income fluctuated. And so when they got into the discussions of how things were going to be split up during the divorce process, she ended up having to pay him alimony. Knowing that in advance, she was able to look at her expenses and realize that her household income was going to be reduced slightly.

Diana Linn:
And thinking of alimony, this may be a good thing to remember to talk to your CPA about if you’re going to be effected by alimony, either receiving it or having to pay it. That with the new tax laws there have some changes in terms of being able to recapture some of those rules of change and it’s no longer tax deductible. You may just want to check with your professional.

Dina Milne:
Yeah, that’s very important. Thanks Diana. On a completely different note, another example, this couple that I talked about was a younger couple. There was another couple that we worked with. The wife had actually stopped working when she had children, when the children were old enough to go to school she was planning on getting back to work and her mom fell ill so she ended up taking care of her mom. Her mom was ill for about 15 years and then passed away. By that time her dad needed some care and so she kind of became this caregiver her whole life. And finally when she returned back to her everyday routine, she and her husband had difficulty kind of moving on and they ended up deciding to divorce. It was an amicable decision. But the unfortunate thing was her husband was retiring right at that point in time and his company didn’t offer a pension. There was a huge change in income because now all of a sudden you have to look at other sources of income.

Diana Linn:
I think you’re making a really wonderful point here in this initial data gathering stage of preparing for this divorce, it’s really important to consider what stage of life you’re in. Are you working or retired? And if you’re working and your spouse wasn’t, as you mentioned with alimony, you may need to pay your spouse an alimony as a form of income or perhaps you will be on the receiving end of alimony. That’s for the courts to decide based on current and potential income sources. Really you’re in unknown territory. And the key to this would be having a financial plan. This is going to help you put some of these moving parts into place. It’s going to provide context, structure release so you’ll know how all these different moving pieces and factors are affecting you.

Dina Milne:
And what if you’re retired, Diana?

Diana Linn:
Well, if you’re retired, it might feel even scarier. You’ve got two transitions that are happening at once. You’re no longer with your partner and you’re no longer working. There are some planning opportunities that you can take advantage of here as well. For example, Dina, you and I were recently discussing that some of your clients were surprised to find that if you’ve been married for at least 10 years, you’re eligible for spousal Social Security benefits. And also in many states, you’re entitled to one half of your spouse’s pension, or you may need to be paying half of your pension to your ex-spouse. Again, this is where it’s important to know your state laws.

Dina Milne:
A second important consideration is understanding the types of assets that you own. Are these assets taxable? Are you going to pay taxes on them when you take them out? Are they tax deferred? Are they liquid? Is it easy to convert them into cash or not liquid like a house? What is it? Is it real estate? Is there a loan attached to the real estate? Are they valuables like antiques, collectibles? It’s very important to understand the unique character of the different accounts that or different assets that you own.

Kate Austin:
Definitely. And I think most attorneys are going to be looking at the accounts and assets just really from a value perspective. But looking at the accounts of equal value is only part of it. I think it’s very unlikely that every account or asset that you own will be split in half. All illiquid assets are going to be sold and you’ll get the cash. The lawyers are looking at the value of the asset today and not necessarily the after tax asset.

Dina Milne:
Kate, can you give us an example?

Kate Austin:
Yes, definitely. If you have, let’s say a $500,000 IRA and a $500,000 money market account, obviously they’re both $500,000. But they’re not actually the same. An IRA is usually tax-deferred, meaning that no taxes have been paid on it, meaning that you will later have to pay taxes on it. Remember only two things are certain in this life, death and taxes, and hopefully you’ll need this money when you’re retired and in a lower tax bracket.

Diana Linn:
Right. And also remember that there is a 10% penalty if you’re withdrawing from that retirement account before you hit the magical age of 59½. You’ll definitely want to have some other liquid taxable investments to pull from until then.

Kate Austin:
Great, great point. And a money market or a brokerage account has typically already had taxes paid on a portion of it. It’s going to look a little bit different than a retirement account. And I know we’re using a lot of terms, like usually, sometimes, typically because these are very personal, it’s really important to consult with your professionals, your adviser, and your tax accountant to make sure that you’re getting the full picture of what’s actually going on so there’s no surprises. Because it’s also a good idea to have in your mind an idea of what you want going forward in any type of negotiation.

Diana Linn:
Right, right. And also put a quick reminder in that your financial health and your overall financial plan is more than just the investments. Here it’s going to be, while you’re in that still data-gathering phase of preparing for the divorce, it’s important now to revisit your beneficiaries. You may not want your ex receiving any of your assets if something were to unexpectedly happen to you. You’re going to want to update your insurance policies and who’s going to receive any cash balances or those death benefits. Also know your estate plan and how that that’s set up. As Kate, as you’ve mentioned, it’s really important to engage your personnel and professionals.

Diana Linn:
You may need to change your tax-filing status. You’ll no longer be filing as married filing jointly. There are some different deduction limits now that you’re single. Notify your CPA, your financial planner, your attorney, somebody that’s going to really understand the state laws and is going to be looking out for your best interest. And remember that what worked for your friend may not necessarily work for you if you’re living in a different state.

Kate Austin:
Or even if you’re in the same state, it might just be in a totally different arena.

Diana Linn:
Everybody’s situation is different and so the more you plan and the more people that you get on your side, the smoother things are going to be during this chaotic time.

Dina Milne:
And I just wanted to add a tip here too. Any money that comes from an inheritance or a gift, you should really keep those funds separate in a separate account. The reason being that once you put them into a joint account, you actually gift them to your spouse and they become joint assets. Whereas if you keep them separate, they and you go through a divorce, you’re not going to be including these assets in the marital assets. I know, when you get an inheritance, you’re not necessarily thinking, oh, I better keep this aside because I might get a divorce. But you never know. It’s just a good practice.

Diana Linn:
And this is a place where again, those state law differences come in. If you’re living in one of those nine community property states, your situation could be different. So yeah.

Dina Milne:
Just to summarize before we move on to the next stage, it’s so important to know your budget. Understanding your current sources of income and how they can change is also important and understanding the various assets that you own and whether they’re liquid or not and the tax implications that they have. And finally, planning is key. Plan, plan, plan.

Dina Milne:
Let’s move on to kind of the mid-process. The decision has been made, you have filed for divorce, you’re going through the divorce right now. The lawyers have gotten involved and this sometimes really makes things hard. It’s more concrete. You’re actually dividing the assets and there is a possibility that there might be some illiquidity and so you have to sell things, your income might be impacted. It’s important to go into this knowing your budget and understanding the assets that you own.

Kate Austin:
Yeah. Hopefully now you’ve been living on your own for a few months. You have a better idea of your expenses and budget. Luckily there are some really great budgeting apps out there that you can use. For example, Mint is a great one and some credit card companies have really nice tracking features.

Diana Linn:
We have a wonderful budgeting tool here at Adviser Investments too, our Adviser Insights, which was part of our financial planning program we use.

Kate Austin:
And now’s a great time to get a handle on your discretionary expenses because those are a little bit more in your control. And of course with any change there’s going to be some indigestion as you get used to your new normal and be kind to yourself there. We don’t want you to totally change your entire life, but understand that you will need to find a new normal. I know it’s very easy to continue on autopilot, keep the status quo, you want to keep everything fairly consistent for your kids. But it’s even little things like being aware of if you go out to lunch every day while you’re at work, it can be easy to go and buy a $10 or $15 salad every day. But that can quickly add up, so just being mindful of what you’re buying and being mindful of what money’s actually coming in can make this transition period a little bit easier.

Dina Milne:
That’s great advice, Kate. I think it’s also important to review your assets again and just make sure that you are aware of what they are in and what you’re getting in the divorce settlement so a tax deferred account like an IRA or a 401(k) might not be an account that’s as easily accessible. As Diana mentioned earlier, there might be penalties and as Kate mentioned, there are tax implications to doing that. Also think about the assets that you own that might be illiquid, like real estate. You want to be very careful with that.

Dina Milne:
In addition, also be aware that if you are receiving real estate that has mortgage, a mortgage link to it, you are now requalifying for that mortgage on your own because you are now the sole owner of this property. If you do not have an established credit history or you are retired or there’s no regular income, this could be a challenge. You need to really fully understand the ramifications and what the characteristics of all these assets that you are getting in the settlement are exactly.

Kate Austin:
Definitely. I was working with a client that was going through a divorce, well after she had gone through her divorce and she and her ex had about $40 million of total assets prior to their divorce. One would think, plenty to go around. Well, actually, no. The wife ended up taking all of the real estate assets that the couple owned and the ex-husband took all of the liquid assets. The wife had an emotional connection to the real estate that she owned and she wanted to keep, but really she set herself up for a very sticky situation going forward. She gave all of the tax-advantaged and liquid assets and retirement accounts to her husband, and so now she needed to really build her retirement and liquidity out of these illiquid assets.

Dina Milne:
How did she do that, Kate?

Kate Austin:
It was a very tough couple of months because she didn’t leave herself any room to have cash for some of the repairs that needed to be done on the house before they were sold. She didn’t take into account the brokerage fees that she was having to pay. It ended up being an okay situation, but it looked a little dicey for a couple of months. And I know she was very stressed out about it. This is something that going into the negotiation if you’re aware of, hopefully we can mitigate a little bit of that stress. And I think as women we want to keep the status quo. You have an attachment to something, you want to make sure that your kids are in the same, that they don’t, they’re really not emotionally affected by what’s going on.

Kate Austin:
But don’t forget too, you have to plan for the future. There’s that old saying when you’re on the plane, you have to put your safety mask on first and then help those around you. If you’re not taking care of yourself with making sure that you have enough money for today and retirement money, you’re really not helping. You’re neither helping yourself nor your kids.

Diana Linn:
I love that analogy. That’s perfect.

Dina Milne:
I think also I just want to kind of go back to that example that you gave. This is an example of somebody who also didn’t get great advice from the team of professionals that she was working with. I’m sure her attorney should have advised her differently. It’s just key to really make sure that the people that you’re working with have your best interest in mind.

Kate Austin:
Yeah, and we’ll give the attorney the benefit of the doubt. Maybe they didn’t know, maybe they weren’t aware, but she was in a sticky spot and from the attorney’s perspective it looked divided pretty even. But clearly it definitely was not.

Diana Linn:
This is where it’s important that while you’re in the divorce process too, you really want to monitor that everything is being played out the way that you want it to be played out. I know I mentioned this already, but it’s definitely worth repeating that now that the divorce is finalized, you want to make sure that those beneficiaries were updated the way you wanted them to be updated. Your power of attorney healthcare proxies.

Kate Austin:
Oh yeah. You don’t want your ex pulling the plug.

Diana Linn:
You might not want that person making those decisions for you any longer. Lean on your professionals. I know we’ve said that, but it’s so important to be sure you’ve got somebody on your side and somebody that’s thinking outside of the box. For example with the home that you were mentioning, if the couple had decided to sell the home and then divide the liquid assets from the sale costs, you may be entitled to some additional tax benefits of the tax exclusion if you’ve lived there for five years, of up to $500,000. Just monitoring the process as this is happening, that it’s going the way you want it to go.

Kate Austin:
It’s important, I know Diana, you’ve mentioned a couple of times now, how important it is to make sure that your beneficiaries are up-to-date and changes are made to update your plan. You just reminded us of a story with a client that we just went through recently. She was divorced, she’d been divorced for about 15 years and her ex-husband, who had a daughter from a previous marriage suddenly passed away. He had forgotten to remove her as a beneficiary on the plan and his daughter had been a contingent. And so our client got the call, “You’re a 100% beneficiary on this account that belongs to the man you divorced 15 years ago.” And so our client actually renounced her rights to the IRA and her ex-stepdaughter got the account. But this happens so frequently, you cannot imagine.

Dina Milne:
Well, and can you imagine being the daughter of your what would that be?

Kate Austin:
The daughter of your father.

Kate Austin:
The daughter of the father. But could you imagine really being the daughter and expecting that you were going to get this inheritance and then come to find out it’s going to your dad’s ex-wife. That had to be a very unpleasant surprise if your client hadn’t been so nice.

Dina Milne:
That could have been awful. And again, as I said it happens unfortunately. Now many states have actually started implementing changes to try to avoid situations like this.

Kate Austin:
Sure. But then you have to get attorneys involved and it’s not as streamlined as it could be.

Diana Linn:
There can be complications if it’s a trust asset that the person is a beneficiary of, if those trust documents weren’t changed, there could be clauses in there that prevent somebody from contesting. Important to get it all updated.

Dina Milne:
Just to summarize before we move on, again, it’s important to keep track of your budget. Kate and Diana had some good tips on that. Make sure that you know your assets and how they fit into the stage of life that you’re in. Be aware of taxes and how the changes may impact you and make sure that you update your plan. Now let’s move to the final stage. This is after the divorce has settled. If you’re not prepared for this, this might be a tough stage. Your standard of living may be changing, you may feel alone, but it’s not the end.

Diana Linn:
No, this isn’t the end. This is the beginning of a new chapter for you and it’s an opportunity to reset your financial priorities and what’s important to you and not necessarily what was important to you as a former couple. For example, my husband and I frequently speak of getting a vacation home, a cabin up in New Hampshire someday, but if we were to get divorced, I’m not so sure. Is that what I want a vacation home in New Hampshire or do I want to buy a beach house in Florida? This is the opportunity to revisit that and also to take a look at your asset allocations and your risk tolerance. Not what your risk tolerance was together as a couple. Maybe your ex-spouse was a little bit more aggressive with the assets and then you were comfortable with. Think about your goals for your money and build a plan that’s going to work for you.

Kate Austin:
Well, and I love the metaphor, so I’m going to keep going with it, Diana. It really is the end of a chapter but not the end of the book. And it’s important to remember too, a lot of people end up remarrying. About 52% of women end up remarrying. And in this case you might want to consider a prenup just so everything’s kind of laid out on the table. Hopefully you’ve had all of your estate planning documents and financial planning documents, have a nice bow on them. But almost a 50% of attorneys have noticed a rise in the number of women requesting a prenup.

Kate Austin:
For me personally, I’m getting married next year and my partner and I have already agreed on getting a prenup. Am I getting this prenup hoping that I’m getting divorced? Absolutely not. But I do own a condo and I have an IRA and a 401(k) and he has his own assets, too. And I think it’s kind of like fire insurance. You hope your house never burns down, but if it ever does, you’re really happy that you have the insurance. And I would say too, because we’re getting the prenup, it’s having us talk about a lot of issues and financial priorities and obligations that we probably wouldn’t have talked about over a typical date night dinner.

Diana Linn:
And I think it may be too soon for some people listening to this podcast that think about remarrying if you’re still somewhere in the divorce process. But it is important to note that remarrying adds a whole other layer to the planning process of making sure that then you’ve got things set up in the way that you wanted to. For example, if you’re remarried and you have a trust, you want, if something were to happen to you, maybe to continue to provide income to your new spouse, but if something were to happen to you when you pass away, that money is given to your children. Again, to plan, get the right professionals on your side to help make your new marriage a successful one the way you want it to be.

Kate Austin:
Yeah, I think, as long as you focus on the essentials and you understand and have control over your finances, I think you’re on track and you’ll be okay.

Dina Milne:
We can’t stress enough how important it is to plan. And I know it’s never going to be perfect. It’s never going to be smooth. But as much as you can, plan and understand and keep track of things, it’ll just make things a lot easier. Keep track of your budget, know your assets and update your financial and estate plan. Ladies, do you have any advice?

Kate Austin:
I would just say, echo again what we’ve been saying all along, but consult the professionals that are on your team, your attorney and your adviser and your tax consultant and I make use of them sooner rather than later.

Diana Linn:
I think I want to repeat something you said earlier today of taking care of yourself so that you can take care of others. Really keeping in the forefront of your mind what you want the outcome to be and your assets and my motto of “plan, plan, plan.”

Dina Milne:
Thanks. Thanks, ladies. This has been Dina Milne, and I’ve been joined today by Kate Austin and Diana Linn. Thank you for joining us today in this edition of The Adviser You Can Talk To Podcast. We hope that you found it helpful, and if you’ve enjoyed the conversation, please do subscribe. You can also check us out at adviserinvestments.com/podcast. We will have more to come as part of our AdviseHer series, but if you have any topics that you’d like us to explore, please send us an email at info@adviserinvestments.com. We’d love your feedback and love to hear from you. Thanks for listening.