How To Keep Your Divorce From Ruining Your Finances
A divorce can be devastating to your finances if you aren’t prepared. The divorce settlement determines who gets what, but that’s just the beginning. It’s important to take stock of your financial situation and make moves to start rebuilding your finances on your own. “Once the financial dust settles after a divorce, start by getting clarity on where you stand financially,” said Natalie Taylor, a certified financial planner in Santa Barbara, California. “How much do you have in savings? Do you have any debt? What do your income and expenses look like? How much do you have saved for retirement?” Also get a handle on your tax situation, credit score and insurance. “Understanding what your finances look like post-divorce and getting everything organized can help you feel more in control, and it gives you the information you need to decide where to focus,” she said.
Set New Financial Goals
“Even if you have many of the same goals on your list — such as sending kids to college, retirement, paying off debt — the resources you have available to accomplish those goals have likely changed and your divorce may have implications for benefits you’ll receive in the future,” Taylor said.
For example, understand how much you may get from your former spouse’s pension or Social Security benefits in retirement. If you were married for at least 10 years and aren’t remarried, you can receive Social Security retirement benefits based on up to 50% of your ex-spouse’s benefit, if that is larger than the amount you are eligible for based on your own work history. You can receive up to that amount when you reach full retirement age (age 66 or 67, based on the year you were born) or you can receive smaller benefits starting at age 62.
Run your numbers through a retirement calculator to figure out whether you need to change your plans to reach your goals — whether by working longer, spending less, saving more or making major changes such as moving to a less expensive area. “As you create a new financial plan for your own retirement, it’s important to be aware of how things have changed now that you are post-divorce,” Taylor said.
Make the most of tax-advantaged opportunities to save for the future and build up your own retirement savings. If you work for a company that offers a 401(k), contribute at least enough to get any matching contributions from your employer. You can contribute up to $19,500 to a 401(k) in 2021 — plus an extra $6,500 if you’re 50 or older. You can also save up to $6,000 to a Roth or traditional IRA in 2021 ($7,000 if you’re 50 or older), which can be a great option even if you don’t have a retirement plan at work. If you have any freelance or self-employed income, you can contribute to a Simplified Employee Pension (SEP) or solo 401(k), which you can set up at a brokerage firm, bank or mutual fund company. See the IRS’ Retirement Plans for Self-Employed people for more information.
Redo Your Budget
You’ll have new expenses — and a different level of income — after the divorce. “Assess your new household income and expenses,” Taylor said. “If you kept the house in the divorce, you may find that you have a large mortgage that you now have to cover on one income. Your budget might be tighter or more generous post-divorce — either way, it’s important to know where you stand so you can make necessary adjustments.”
This can be a good time to use budgeting software or a budgeting app (such as the You Need a Budget app, YNAB) to make it clear how much money you have for each of your expenses and goals, and to set your priorities for each dollar that comes in.
Check Your Credit Record and Tackle Your Debt
Your debt responsibilities may be very different after the divorce. “Run your credit report to verify exactly which debt is still under your name, and make sure it matches your divorce decree,” Taylor said. You can get a free copy of your credit report every 12 months at www.annualcreditreport.com. It helps to check your credit score, too. “Find out what your credit score is post-divorce, as it may have changed,” Taylor said. See FICO’s credit education page for more information about improving your credit score.
If you’re having trouble paying your bills and your debt, you can get personalized budgeting help from a credit counselor or a financial empowerment center in your community. “Speaking with a nonprofit credit counselor when the first signs of trouble appear on the horizon can make it easier to make informed decisions that can help avoid a crisis,” said Bruce McClary of the National Foundation for Credit Counseling (NFCC), an organization of nonprofit credit counseling agencies. Even though credit counseling agencies are known for their debt management programs, which can help people who are behind on their bills, many of the agencies offer budgeting counseling that can help before you get to that point. You can find nonprofit credit counseling agencies through the NFCC website. You can also get help from financial empowerment centers, which are offered in partnership with local government in several cities throughout the U.S. They offer free, one-on-one financial counseling to people of all income levels, and can help you set up a budget and prioritize your expenses. See this FEC map for details.
Build Your Emergency Fund
Over the past year, everyone discovered the importance of having an emergency fund to cover unexpected expenses — such as from job loss, extra child care costs, medical bills or housing expenses. Without an emergency fund, you could land in expensive debt that makes it much more difficult to reach your financial goals. Recalculate how much you need in your emergency fund after the divorce — and start to focus on rebuilding the account. “After legal fees and separating assets, you may not have much left in savings,” Taylor said. “Aim to build an emergency fund equal to at least three months of income, and if you have children or have a mortgage, aim for six months of income.” Keep the money in a safe account you can access quickly if needed, such as a money-market account or online savings account, and separate it from the account you use to pay your regular bills.
Update Your Estate-Planning Documents
“Divorce is one of those significant life changes that means it’s time to update your estate plan, both because what you would want to happen with your estate and the people you would like to take charge in the event of your incapacity have likely changed,” said Harry Margolis, an estate-planning attorney in Boston and author of “Get Your Ducks in a Row: The Baby Boomers Guide to Estate Planning.”
Update your will and any trusts to designate who you want to inherit your assets, now that what you own and your wishes are different than they had been in the past. And it’s also important to update any documents that give a trusted person the power to make financial and healthcare decisions on your behalf if you become incapacitated. “The most important documents to change may well be your durable power of attorney and healthcare proxy because you probably don’t want your ex-spouse making financial, legal and healthcare decisions for you in the event of your incapacity,” Margolis said.
And don’t forget to update the beneficiary designations on your life insurance and retirement plans, which determine who inherits those accounts no matter what your will says.
“All too often, people don’t take this step and at their death these assets pass to the ex-spouse or to the ex-partner when there hasn’t been a formal marriage, but people have moved on with their lives without reviewing these designations,” Margolis said.
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Last updated: July 19, 2021