People often make irrational financial decisions during divorce just to get the messy situation over with.
But hasty choices can haunt you for the rest of your life if you’re not careful about your own financial planning post-divorce.
To take control and learn from the mistakes many divorcees have learned the hard way, we’re sharing here some of the biggest blunders made in divorce financial planning.
These tips can also help if you’re in the midst of your settlement too.
Top 10 Divorce Financial Planning Mistakes to Avoid
Learn from these errors so you can better prepare for your new future:
#1: Not Having a Firm Grasp of Your Expenses
If you don’t have a firm grasp on your pre- and post-divorce expenses, you may unknowingly make the mistake of not asking for enough spousal support, or any at all for that matter.
Do this and you may not be able to keep up the life you’re accustomed to.
Instead, get your financial house in order by truly understanding what your current and future expenses are. If your spouse has always been the one to pay the bills, those days are over, and you need to acquaint yourself with how much things really cost.
Do you have young children? Teens near college age? Or are you approaching retirement and a reduced income? When your spouse is no longer around, will you need to hire a handyman or a cleaning lady?
Have this information handy at your divorce financial planning meetings so you know exactly what’s going on when the time comes to talk about spousal support.
#2: Keeping a House You Can Afford
The family home can be difficult to give up. One spouse often wants to keep it, especially if they still have young children. But, as a single person, it is often not feasible to maintain the mortgage and expenses.
If the taxes, insurance, mortgage, and other house-related expenses equal a third or more of your individual income, you’ll be considered “house poor” and may be left in a snowballing situation of accumulating debt that only gets worse.
Instead of keeping a house you cannot afford, you may be better off financially if you sell the property and split the proceeds.
A Certified Divorce Financial Analyst will be able to assess your unique situation to help you determine the right course of action.
#3: Completing a Qualified Domestic Relations Order Too Late
A QDRO, or Qualified Domestic Relations Order, is a legal order that splits up retirement plans, such as pensions, 401(k)s, and 403(b)s, during a divorce.
Since many couples focus on current assets and financial standings, they often miss future earnings such as tax-deferred retirement funds.
It is extremely important to have the QDRO prepared and reviewed by the administrator of the retirement plan to confirm that the proposed division is permissible within the rules of the plan. You must do this before the judge signs off on the QDRO and the divorce is final. You will be out of luck if you find out after the divorce is final that the QDRO, as you’ve outlined it, cannot be followed because the plan rules don’t allow it.
#4: Forgoing Life Insurance
Life insurance is another often-missed area that can become a costly mistake.
For spouses receiving alimony and child support, you may lose all your financial support if the paying spouse dies, and there was no life insurance policy in place.
To protect yourself, be sure to include a provision in the divorce settlement that the supporting spouse purchases a life insurance policy, and assigns you the beneficiary and owner of the policy. When the supported spouse is the owner of the policy, he or she will receive all notifications including alerts that the premium payment is late or unpaid.
#5: Failing to Update Important Legal Documents
While you were married, you and your spouse responsibly worked with an attorney to create your wills and estate planning documents, and you haven’t thought about them since.
Now that the two of you are divorcing, you need to rethink each of those documents–namely, your will, healthcare surrogate, durable power of attorney, living will, and any existing trusts. You don’t want to remember at the moment a family crisis happens.
Many people fail to do this, and, as we see time and again, they also forget to change beneficiaries on retirement plans and insurance policies.
Don’t make these same costly mistakes or this next one.
#6: Not Securing Copies of Important Records
If you’re used to keeping important documents such as birth certificates, social security cards, and the like in a security box you share with your spouse, it’s time to reconsider where you’ll keep these items before leaving your once-shared home.
At a minimum, it’s important to at least obtain copies of these documents if you decide not to move them from their original, safe location.
#7: Not Obtaining Access to Financial Accounts Pre-Divorce
Another big mistake is not gaining access to all bank accounts, safety deposit boxes and other important financial assets before serving the other party with your divorce petition.
Do this and you’ll have a much harder time obtaining access once the divorce process has started.
Ensure you have access to all financial accounts–past statements and current balances–well before you start divorce financial planning.
#8: Not Understanding How to Equitably Divide a Stock Portfolio
It’s also a good idea to sit with a Certified Divorce Financial Analyst to determine the true value of your stock portfolio, considering gains and losses, so the split doesn’t cause a disproportionately large capital-gains tax hit for one of you.
The division itself does not have a tax consequence but liquidating shares post-divorce most likely will. Each spouse should understand what that could look like before the settlement is finalized.
#9: Failing to Understand Your Insurance Policies
A Certified Divorce Financial Analyst can also help you review your insurance policies so you understand what is covered and what is not under this new split.
Failing to do this can result in not having the right amount of coverage when the time comes, which also happens with this next mistake.
#10: Not Planning For Future Insurance Needs
You should also consider how your insurance needs will change with this new settlement.
Don’t forget insurance planning extends to your children too, not just your property. And what about health insurance and car insurance?
Who will become responsible for paying premiums now and in the future when your kids are older?
Think about this answer before sitting down at your divorce financial planning meeting so you’re not caught off guard.
Don’t Make These Common Divorce Financial Planning Mistakes
Equipped with this information, there’s no reason you should make these same mistakes and learn these lessons the hard way.
Consider going over each one in detail so you’re well-prepared for your divorce financial planning and so there are no unexpected surprises down the line.
For professional advice on your specific situation and financial planning after divorce, speak to a Certified Divorce Financial Analyst today by calling 561-686-9604 now.