- Amid divorce, lower-earning soon-to-be ex-spouses often underestimate the future costs of living single.
- Financial advisors should be involved in the entire divorce process, say advocates.
- Divorcing couples should plan for what they need rather than react to what they're offered.
When dealing with a divorce, it can be hard to focus on your future finances. However, it's crucial to face up to them sooner rather than later.
"People often say 'I just want out,' but the reality is going to hit you later," said certified financial planner Niv Persaud, managing director and certified divorce financial analyst with Transition Planning and Guidance in Atlanta.
Persaud finds that lower-earning spouses are frequently unaware of — and surprised by — the true costs of living. For example, if they want to keep the house, they often overlook expenses such as lawn care, roof replacement and property taxes.
Persaud developed a 10-point list to help clients become aware of what she calls "lifestyle costs." (See list below.)
Another big misunderstanding is that people think they'll get spousal support for the rest of their lives, but that's not how the legal system works, according to Persaud.
Furthermore, she said, "every state and every county has different laws and a lot depends on the judge, so it's important to use an attorney from your county."
The average person also doesn't understand that not all assets are created equal, said CFP Kristina Caragiulo, a certified divorce financial analyst and wealth manager with BDF in Chicago.
"For example, $10,000 in an [individual retirement account] or brokerage account is not the same as $10,000 in cash due to their different tax implications," she said. "IRAs and brokerage accounts can trigger taxable gains."
The role financial advisors play
"Financial advisors need to be involved throughout the divorce process because there are so many financial decisions that could impact the rest of [clients'] lives," Caragiulo said. "It's the one time in your life when you can see the impact of a decision before you make it."
Among other things, advisors can look at allocations in the asset classes of brokerage accounts to develop rate of return assumptions, she added. "In turn, they can show different scenarios and the probability of success in covering your post-divorce expenses."
CFP and certified divorce financial analyst Claudia Mott, owner of Epona Financial Solutions in Basking Ridge, New Jersey, said there is an overwhelming number of changes to deal with.
"I call it the 'Year of Fear,'" she said. Mott listed some important ways financial advisors help divorcing spouses tackle financial issues, including:
- Education: Mott often answers basic questions about home equity, the components of a mortgage and how insurance works.
- Consolidating accounts: Advisors handle post-divorce transfer documentation and set accounts up properly (e.g., retirement vs. non-retirement).
- Pre- and post-divorce planning and investing: They work to meet your immediate and long-term goals.
Financial advisors also can be called in as consultants for divorce proceedings. CFP and certified divorce financial analyst Michael Black, owner of Michael Phillips Black Wealth Management in Scottsdale, Arizona, provides financial analyses for lawyers to present in court for the judge to make a decision.
Black describes himself as a "litigating [certified divorce financial analyst] who exposes the financial implications for different scenarios and differing spousal interests." His input is necessary, he says, because "the lawyers who are applying the law are not trained to develop and present a case to a judge with a perspective of what that means financially to the client."
"Their job is to present a case that meets the requirements of local laws and customs," Black said. "They don't focus on the most advantageous financial outcome for the clients because that's not their training, responsibility or interest."
Therefore, Black performs the financial modeling for attorneys and courts to identify the client's post-divorce financial needs and set the financial road map. The trickiest part, he said, is knowing which assets best meet clients' needs.
"If they're not working with a financial advisor, it's often up to the client to advise their attorney on what assets meet their needs," Black said. "But frequently, clients don't plan in advance for what they need; instead, they react to what they get."