New year, new life?
The new year can mean new lives for many couples. Divorce filings usually increase by one-third in January, according to the American Academy of Matrimonial Lawyers. The spike, say divorce attorneys, is due to couples avoiding filing during the holidays.
Besides taking an emotional toll, divorce can also create financial challenges – particularly for women. The standard of living for women drops anywhere from 27 percent to 37 percent after a divorce, according to the National Marriage Project and U.S. Census Bureau statistics. Researchers at the University of Utah estimate that divorcing individuals need more than a 30 percent increase in income, on average, to maintain the same standard of living they had prior to their divorce.
If you’re in the midst of a divorce, creating a plan of action to avoid financial fallout is key. Here are some strategies to keep in mind before signing the divorce papers.
Assemble the experts: While finding a good divorce attorney is the first step in any divorce proceeding, a close second should be locating a team of trusted advisors who have your best interests at heart. You may need to hire a new accountant, financial advisor and estate attorney. It’s tempting to use the professionals who served you and your spouse previously, but a new professional can provide a fresh perspective and guidance free of any conflict of interest.
Think long term: Assets from a divorce settlement often include cash, child support, alimony, the martial residence, and retirement accounts. The key is to keep these assets as liquid as possible. For example, while a marital residence offers a sense of emotional security, it may also include high property taxes, monthly mortgage payments and expensive maintenance costs. Instead of staying in the marital home, consider selling it and downsizing into a smaller home. If there is any extra cash leftover from the sale think about reinvesting this surplus into income-producing investments.
In addition, if you are awarded alimony, attempt to save a portion of money from every payment in a retirement or income-generating account. Remember that alimony is taxable but child support is not. And lastly, remember that at age 59, you can convert retirement accounts into investments that pay you income. To make the money last, try to withdraw no more than 4 percent from your investments adjusted for inflation annually.
Tally your expenses: Depending on how you and your spouse handled finances, you may face expenses you hadn’t encountered previously. The list includes property taxes, mortgage payments, car payments, health insurance, college tuition, living expenses and federal and state income taxes. Once you have a clear sense of what the numbers are, create an annual budget based on what you need to live comfortably. Odds are you will need to make some lifestyle changes to make the figures work.
Plan for the future: Purchase term life insurance to protect your children in case you should die. Be sure to write a new will, change the beneficiaries, and guardians. Finally, prepare for the day that alimony ends. This may mean a job or career change if your earnings won’t cover your expenses. Devise a plan to make up for the loss of income once that last alimony check arrives.
Like anything in life, the better prepared you are, the greater the chances of success. Planning for a divorce should be no exception. Being set financially will make it easier to move forward with your new life.