Dealing with the emotional stress a divorce brings is the #1 thing most splitting couples worry about, but a close second is money. If you’ve been through a divorce, you know how difficult it can be to try to sustain two households on the same income. If you’ve never been divorced, you’ve still heard the horror stories about wrecked finances. It’s enough to make you wonder if it’s even possible to get through a divorce without taking a big financial hit.
Here are some tips that can help you stay on good financial footing following a divorce:
Know where you stand.
Before you even start a divorce action, be sure both of you know the exact state of your finances. This will help you make rational decisions as you negotiate your divorce. In most marriages, one spouse handles the finances more than the other. If it’s that way in your household, and you’re not the one who handles the money, it’s time for you to learn everything about your income, assets, debts, and the household budget. If you need help, seek out a financial consultant.
Focus on what you need
In the heat of a divorce, it can be difficult to keep your focus on your needs, not your wants. Emotionally, you may want to keep the house, but do you really need to? Some couples may decide to keep the house until the kids are out of school. But can you keep up with the mortgage payments and maintenance on just your income? Before you reach a decision, examine the cost of renting or buying a less expensive home in the same school district. Keeping the family home means you could be financially tied to your ex for as long as you co-own the property unless you are able to refinance and remove your ex from the mortgage.
You also need to consider health insurance if you’re under 65. If you’ve been on your ex’s insurance through work, you should be able to continue with that coverage for up to three years through COBRA benefits, but you will have to make the payments.
Plan for retirement
While Social Security benefits are not subject to division in a divorce, there are some rules that will affect post-divorce income. For example, you cannot collect benefits on your ex-spouse’s record after a divorce unless the marriage lasted more than 10 years and you are over age 62. If your ex-spouse dies, you may be eligible for survivor benefits (100% of your ex’s benefits) provided the marriage lasted 10 years, you are at least 60, and you are not already entitled to benefits equal to or greater than your ex-spouse’s benefits.
Splitting a qualified retirement plan like a pension or 401(k) plan requires the preparation of a QDRO (qualified domestic relations order). This order allows for the division of qualified plan assets in a tax-deferred manner for the receiving spouse, and provides that spouse with 60 days in which to roll it over into an IRA without penalty. If you want to take some money out for divorce expenses, you can make a one-time withdrawal before you do a rollover without incurring a 10% penalty, even if you are under age 59 1/2, but you will still have to pay income tax on that withdrawal.
Establish financial goals.
Establishing clear financial goals will keep you on the right track post-divorce. Even if you are starting over without a big financial cushion, you need to create an emergency fund for any unexpected expenses so you don’t have to go into debt.
Prioritize your retirement over saving for your children’s college. They can always get scholarships or loans and there are no loan options for retirement. Consult with a financial advisor, especially if your ex has always handled your joint finances.