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When a couple decides that divorce is in their future, they typically know how to proceed with the legalities. When it comes to an economic perspective, however, many questions arise that can impact their financial future. Divorce brings with it a wide range of emotions; and making major financial decisions in the throes of emotional upheaval invites disaster.
It's important to take a step back and objectively review one's current financial landscape before signing divorce agreements. Working with a qualified financial advisor, such as a Certified Financial Planner™ or a Certified Divorce Financial Analyst™, can help dilute emotional reactions and help ensure that important considerations are not overlooked.
A common mistake that couples make is underestimating the cost of their post-divorce lifestyles. Going forward, there will be two households to fund rather than one. Also, individuals often change or increase their spending habits after a divorce. They may either spend to make themselves feel better or spend more as they rejoin the single lifestyle. Other unexpected costs may be associated with raising children or rejoining the workforce.
Another potential pitfall can be the desire of one party to keep the house without considering the cost of maintaining it. Most people consider the mortgage, insurance and taxes, but overlook other costs such as cleaning, yard work and large-scale maintenance or repairs. If one person is going to keep the house, a detailed projection of current and potential future costs should be considered.
One opportunity often overlooked is the ability to remove money, in certain cases, from a tax-deferred retirement account without paying an early-withdrawal penalty. Income tax on the money would still apply, but those funds could be used for living expenses if needed. If the divorcing parties are going to split a retirement account, they should consult their tax, legal and financial consultants to ensure the transaction is done properly.
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