When the dream of living happily ever after turns into a nightmare of a marriage, divorce may be the only workable solution.
In addition to the emotional turmoil surrounding a divorce, couples need to deal with the financial realities of going their separate ways. The cost of a lawyer and the loss of a spouses income may come at a high price for one or both parties. Couples may each walk away from the marriage with significantly lower income, assets and retirement savings.
Although divorce is not recommended as an easy solution to marital problems, the situation need not necessarily be a financial disaster. Here are a few positive financial outcomes that can somewhat lessen the pain of divorce.
Easier Budgeting and More Control Over Money
Its no secret that fights over money are a prime mover on the rocky road to divorce. Left solo, partners are free to choose their own approaches to money. A thrifty spouse may find it a relief to be able to cut out unnecessary spending and finally amass some savings. And a spouse whos more free with the funds may enjoy not being criticized for every new purchase.
Early Access to Retirement Savings
Divorce is one of the few times in life a person can withdraw money from a retirement account early without having to pay a 10 percent penalty. This can be accomplished with an agreement known as a qualified domestic relations order (QDRO). Although cashing out money from a retirement account is a decision not to be taken lightly, it can help the newly divorced couple get into a better cash-flow position. It is risky to cash out part of all of retirement savings, but with disciplined saving, the retirement account can be rebuilt.
Social Security Benefits for Older Divorcees
A couple married more than 10 years may be eligible to file for Social Security spousal benefits at retirement. A person who was 62 years old by Jan. 1, 2016, can file a restricted application, allowing them to receive half of the spouses benefit while deferring their own Social Security payments until age 70. This will not affect benefits the ex-spouse will receive.
Opportunity to Reset Financial Goals
Lifestyle changes, including the loss of a family home, furnishings and other joint property including cars, often accompany divorce. However, those major changes give the newly divorced couple a chance to rethink priorities and make a fresh start. Perhaps a move for one or both parties to a more affordable home or apartment may be the start of a simpler lifestyle that can steadily lead to financial recovery.
When Divorce Is Imminent: How to Get Ready
Because each divorce is unique, only a financial advisor familiar with the couples situation can provide solid advice; however, the following tips from experts may help guide you if youre heading for divorce.
Be Cautious with Advice from Friends and Family
Divorce laws vary by individual states, so what applied to a friend or relative may not apply universally. Consult with a qualified divorce lawyer in your own state before making any big decisions about money before the divorce is final.
Track Expenses and Set a Budget
When divorce is inevitable, start tracking your household income and expenses. This is an important first step in determining how to live without full financial contributions from a spouse. Its also necessary information for your divorce attorney, and later a judge, in ruling how to divide assets and debts, and in awarding alimony and child support.
Include rent or mortgage payments, household expenses and maintenance, food, clothing, transportation, entertainment, child care, accounting for everything you spend money on. Once you determine your fixed expenses, set a budget and follow it faithfully to move yourself into your best possible financial state.
Gather Financial Documentation
Gathering your paperwork takes time and effort, but its the only way to ensure you will get a fair deal in the final divorce settlement. Financial records needed for divorce proceedings include the following:
- Checking and savings account statements for the past year
- Retirement account statements
- Financial investment statements
- Records of debt including home mortgage and auto loans
- Credit card statements for the past year
- Recent pay stubs
- List of assets brought into the marriage and assets accumulated during the marriage
- Income tax returns from the past three years
Besides financial upheaval, divorce often comes with intense emotional reactions surrounding the failed relationship. Couples facing divorce often express feelings of sadness, anger, betrayal, exhaustion, confusion and fear about a new future. Having a plan for dealing with a new financial reality will help relieve at least some of the anxiety surrounding divorce.