- Divorce can wreak havoc on finances.
- Getting ahead on money issues is critical.
- Reevaluate your personal budget and income needs, as well as tax laws and retirement savings.
Divorce is a difficult subject that many of us avoid discussing, and when you combine it with a discussion of finances, it often becomes completely taboo.
Divorce can be lots of things: painful, confusing, nerve-wracking. It also can wreak havoc on your finances.
The reality is that post-divorce, you'll likely have to adjust your finances, for a number of reasons. You're now two separate households, so the income may not necessarily go as far. You've probably split assets, and may have to rebuild your net worth. Or maybe you're returning to the workforce after some time. The 2018 National Retirement Risk Index shows that most people would need an increase in income of about 30% to maintain their standard of living after separation.
As you navigate your new financial landscape, keep these key issues in mind:
First, and most importantly, you'll need a new budget. Whether you're paying or receiving child support or alimony, or re-entering the workforce, you'll simply need to adjust to a new financial reality. Use your favorite budgeting apps or software, or speak with a financial professional if you need to, but getting a handle on your new budget is the single most important thing you can do to protect your finances.
Second, remember to update all your financial documents. Your insurance and 401(k), will and powers of attorney should all reflect where your new chapter in life. Start by designating new beneficiaries, and re-assess your legacy priorities.
Next, you'll want to examine your insurance and benefits. Do you or your family members need more or less insurance — car, home, or life? What about modifications to health benefits? The National Center for Biotechnology Information research indicates that for many dependent partners losing health insurance provided by a spouse's work can be a significant adverse consequence of divorce. Or, if you're the primary income earner, should you opt for more disability insurance.
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You'll also need to examine the tax implications of paying or receiving alimony and of any asset settlement in your divorce. As of this year, paying alimony is more expensive, as you'll now pay taxes on the sum paid. Those receiving alimony will no longer pay taxes on the amount received, however. And asset settlements can pose complex tax questions. Be sure you're thoroughly addressing these questions with your divorce attorney or accountant.
Finally, a divorce means splitting retirement assets. A 401(k) plan or other retirement monies and assets that had been meant for two are now split in half. In fact, a 2018 study by the Center for Retirement Research shows that households with a past divorce face more difficulty in maintaining their standard of living in retirement. That could mean needing to work longer, save more, or altogether plan differently for your future. If you haven't spent much time with your finances in the past, now is the time to confront your new retirement trajectory.
A divorce is a new chapter in your life, emotionally and financially. Being honest with yourself — and doing your financial homework — will allow you to lead your best life going forward.
—By Janet Alvarez, financial journalist
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.