Did you know that most divorces occur in the first three months of the year?
Some attorneys call it “March Madness.” The first quarter of the year sees a surge in divorce filings. This phenomenon likely stems from couples strategically waiting past the stress of winter holidays and the hope to avoid disrupting summer vacations before ending their marriages. But while hearts might heal after a divorce, wallets often don’t. Studies show that divorced women can see their retirement savings plummet by as much as 73%, while men experience a smaller, but still significant, 53% drop¹. This financial reality is just one reason why it’s important to be aware of blind spots and understand the full implication of your divorce settlement.
As a Certified Divorce Financial Analyst (CDFA), I talk with a lot of people before and after divorce and often see the same scenarios play out again and again. Here are some of the biggest regrets I’ve heard about divorce settlements:
- Rushing the Process: It’s important to understand the entire financial situation and gather all the necessary documents, including information about jointly owned property, potential capital gains from selling assets, and future expenses.
- Failing to Consider Long-Term Implications: Make sure to evaluate the settlement’s impact on future financial security, including capital gains taxes associated with selling assets like real estate or investments, as well as long-term expenses like childcare costs, or education.
- Not Understanding Retirement Plans: Qualified Domestic Relations Orders (QDROs) are crucial for dividing retirement accounts fairly. You deserve to know how these impact your long-term financial security. Also, don’t forget beneficiary designations. After the settlement, update your beneficiary designations to reflect your new reality.
- Underestimating capital gains exclusion for primary residences. There are tax benefits to consider when selling a primary residence during a divorce. If you meet the residency requirements, you may be eligible to exclude up to $250,000 (single) or $500,000 (married filing jointly) of capital gains from the sale². However, if both spouses don’t meet the residency test, you could face a significant tax burden. Understanding these rules is crucial when deciding how to handle the marital home in your settlement.
- Not properly addressing debt division: Financial infidelity is more common than you might think. Negotiate a fair split of existing debt and consider the long-term consequences of taking on significant debt in the settlement.
- Underestimating the cost of living alone: It’s crucial to review financial projections that include unexpected costs. Factor in increased expenses for housing, utilities, and potentially, healthcare. Will you stay in your current home or move? Consider future expenses like potential repairs, furniture for a new place, and increased insurance costs. Lifestyle creep is real. Those seemingly small expenses you shared with your spouse can add up quickly when you’re flying solo.
- Going solo without representation: While you might be tempted to save money by skipping the lawyer, a divorce attorney experienced in settlements can protect your rights and save you from future headaches.
- Neglecting financial planning after divorce: Divorce is a new beginning. A financial plan helps you take control of your future finances and build financial security as a single person. A CDFA can help you develop a personalized plan that considers your goals and future needs while you are negotiating your divorce settlement, helping you to optimize the financial outcome.
While it can feel overwhelming to know what so many things can go wrong during divorce settlements, keep in mind that you’re not supposed to be an expert in this field. It’s your job to be objective, seek help you can trust, and focus on the bright future ahead of you.
We can offer resources, talk about all your options, and support you along the way. Our consultations are complimentary, so if you’d like some help – please get in touch.
Disclosures and Sources:
Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Bend Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services.
Securities offered through Raymond James Financial Services, Inc., member FINRA / SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Bend Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services. Any opinions are those of Stuart Malakoff and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP, CERTIFIED FINANCIAL PLANNER, and CFP (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
¹ncbi.nlm.nih.gov/pmc/articles/PMC8599059/
²divorcelendingassociation.com/library/the-capital-gains-exclusion-selling-the-marital-home.cfm
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