At a time in one's life that should be their "golden years," women over 65 are 80% more likely
than men to live at or below the poverty line (9% as compared with 5%). One reason for this: divorce.
A woman can expect an almost 30% decline in her standard of living following divorce, while men often see an increase of 10%. Take for example, a woman we'll call Catherine, whose 20-year marriage recently ended. Catherine received half of a seven-figure estate, which included the family home. While this may sound advantageous from the outside looking in, her settlement was not as lucrative as it appeared.
Catherine's pre-martial estate was almost entirely tied up in a family business (i.e., a highly illiquid asset). Instead of receiving a lump sum of cash, or other type of liquid asset, to buy her out of the business, her ex-husband agreed to make monthly installment payments to her over a 10-year period. Essentially, Catherine became a bank, financing her ex-husband's obligation to her at 0% interest.
The monthly, hefty, tax-free payments gave Catherine a false sense of security. She felt she could afford the marital home and wouldn't have to go back to work. However, she would be living off of her assets each month, not her income. So, once her ex-husband made his final payment, not only are there no more assets coming in, but the future value of the asset (had it been invested and not spent) is also lost.
So, how can women achieve a better financial resolution after divorce? Here are five common mistakes to avoid:
1. Waiting to consult a financial expert
During the divorce process, too many divorcées rely solely on their lawyer to evaluate the long-term impact of various settlement options. They look to a wealth adviser afterward to create a financial plan. This is a major missed opportunity.
Your family law attorney is the primary expert in navigating your divorce settlement. However, collaboration by a legal and financial adviser around the details of your marital estate, and how they might impact your long-term financial goals is critical--and most effective before you make an irrevocable decision.
You, and your team, need to have a comprehensive understanding your assets, including tax consequences, earning power, transaction costs and liquidity challenges. For example, private equity, stock options, businesses, residential and commercial property, retirement accounts and collections all have distinct attributes and potential challenges that should be considered in your settlement.
2. Underestimating your liquidity needs
Liquidity (aka, access to cash) should be top of mind. Divorce is expensive: The national average cost for divorce is estimated at $15,000 per person, according to TheStreet.
But there are additional expenses you may not have considered, potentially including new housing, furniture, automobiles and miscellaneous purchases. Beyond the importance of paying for your legal fees and other short-term necessities, it's essential to ensure that the assets you choose to retain have the ability to grow and can ultimately be used to meet your long-term financial needs. Remember:
- Automobiles, boats and furniture are depreciating assets.
- Retirement accounts carry significant penalties and tax consequences if liquidated.
- Real estate can generate high carrying costs, and on average only appreciates at the pace of real inflation.
- Even potentially profitable investments, such as a stake in a business or limited partnership, must be weighed against investible assets (i.e. cash, stocks, bonds, mutual funds), which you can use now to establish long-term security.
3. Letting emotions take over
Clearly, divorce is an emotional process: It's a major change, and so it's understandable that you (or maybe your children) might look forward to the stability of keeping the same home. But this is a great example of where an emotional decision is not necessarily a financially savvy one.
For instance, married couples are entitled to a $500,000 capital-gains tax exemption on the sale of a primary residence; however, you can only exclude $250,000 as a sole owner. Second, by not selling and splitting the proceeds as part of the settlement, you will absorb the full brunt of transaction costs -- including hefty 6% Realtor fees -- that could have been shared. Finally, though each circumstance is different, the equity in your home is probably not an ideal vehicle to support your long-term financial goals.
It's important to consider not only how you feel about a given decision, but the long-term financial consequences.
4. Failing to properly ensure what you're owed in the future
Negotiating the amount of your child support, and in some cases spousal support, is only the first step in ensuring what you're owed in the future. Securing the income is another ballgame. Across the United States, more than half of custodial parents fail to receive full child support payments.
With that in mind, put a wage assignment order in place to ensure child and spousal support gets paid -- even in the most amicable situations.
You should also consider using a life insurance policy to insure all support obligations. To get started, consider the following steps:
- Begin by checking whether your existing policies have death benefits large enough to cover the present value of future support.
- Negotiate so that ownership of the policy is transferred to you. If this is not possible, work with the insurance company directly before completing your agreement. In either case, you need to ensure you are notified immediately if premiums are missed.
- If you need to purchase a new policy, attempt to negotiate the premiums into your settlement so that the paying spouse covers the cost. After all, the policy is insuring their liability to you.
If your settlement includes an equalizing payment, whether in a lump sum or series of payments, there are steps you can take to ensure its integrity. For instance, you can work with your attorney to create a support order ensuring that the payment is not dischargeable in bankruptcy. And to protect yourself from nonpayment, you can explore a deed of trust specifying collateral. Incentivize your former spouse to be timely and diligent with payments: Pursuing enforcement through legal channels is expensive and time-consuming.
If the equalizing payment has been ordered without collateral, or there otherwise won't be sufficient funds to satisfy the payment in the event of your former spouse's death, consider taking out a life insurance policy. While this important step won't protect you in the case of bankruptcy, it will safeguard your asset in the event something happens to your former spouse.
5. Not accepting your 'new normal'
With the marital balance sheet often split in half, plus two lifestyles to fund, change is likely inevitable, regardless of the amount of support you might be receiving or your post-divorce net worth. Failure to adapt to these new circumstances can be dangerous, as overextending yourself in the present can lead to catastrophic financial consequences in the future.
Often the obstacle is not having a comprehensive understanding around the type of lifestyle you can afford based on your new financial framework. It's wise to work with a wealth adviser to create a plan around your spending that won't sabotage your long-term goals. Strive to live below your means; generating a surplus each month to help you rebuild your assets will give you peace of mind, and that's the best lifestyle of all.
Educate yourself about common mistakes--as well as best practices--so you can be better equipped to thrive in your next chapter.