Millú Ramirez, CFP®
A recent study finds that 95% of women do not use a financial planner when going through a divorce. Only 5% used a financial advisor as part of their divorce team. Out of the divorced women interviewed, 61% said they wished they would have known to use a professional financial planner. Unfortunately, the statistics show that 50% of marriages end in divorce. If you are heading in that direction, be aware and don’t fall for the following mistakes:
1. Taking financial or legal advice from family and friends
During a divorce, your emotions are going to take you on a daily roller coaster. Your relatives and friends may have the best intentions, but following the wrong advice can cost you a fortune. Think strategically and do not take any action without obtaining professional legal advice. Don’t let him/her wear you down. Start with the mediation option. Mediation is where both spouses and a mediator, a neutral third party, try to reach a reasonable mutual solution to all the financial and custody issues. In many cases, it will save both of you money and emotional trauma when kids are involved.
If you were not involved because of a lack of interest or not privy to the financial decisions, you need to become financially literate “pronto.” Learn the differences between taxable, tax-deferred, and tax-free accounts. If you take half of the 401(k), you have to pay taxes when you withdraw the money. If you take the brokerage account, you have to pay taxes on the capital gains. If you can’t sell the illiquid assets and pay the IRS, how do you get the cash? Remember CASH IS KING!!!
In a few cases, a couple is sufficiently wealthy to maintain two households, but for most families it’s not the case. Your family will have two rent/mortgages, two sets of utility bills, etc. If you have been out of the workforce, a judge most likely expects you to go back to work. Do not get emotionally attached to the house and insist on keeping it—the bigger the home, the larger the expenses and the headaches. Don’t be real estate rich and cash poor. You can downsize, build a life in your new place, and have more financial freedom and flexibility.
Once the final divorce decree is signed, it will be almost impossible to make changes. Analyze the tax implications both for the short and long-term options. Divorce attorneys are not trained to perform that type of in-depth analysis. Hire an experienced Certified Financial Planner™ that can run “what if” scenarios. Women who fully understand their household finances show up more confident at divorce discussions, secure a bigger payout, and feel the most positive post-divorce.
If you received alimony and support for your children and your ex-spouse drops dead in three years, you will kiss that income goodbye. Make sure that as part of the settlement, you own a significant life insurance policy to cover all anticipated family financial plans, including college expenses.
At Urban Wealth Management, we focus on helping women undergoing life transitions events ensuring financial peace of mind. My specialty as a CFP® is advising women recently widowed or facing a divorce, working hand in hand with her team of advisors.