It’s the most stressful of times. People experience loss of self-esteem, weight loss , and anxiety going through a divorce. It's not the best time to be making life changing financial decisions. Divorce attorneys are experts on the legal side but not always on financial issues. Too often, settlements end up with a straight division of assets and that’s when problems begin.
Here are the 10 most common mistakes people make:
1. 401(k) and IRA beneficiaries. The legally required default beneficiary designation is for the spouse to receive the assets. That means that if you or your spouse never named someone, it defaults to the spouse. That’s what your 401(k) provider, broker or mutual fund company will have on record. Make sure you change these.
2. Insurance beneficiaries. There is typically not a default life insurance beneficiary. But make sure these are changed or updated, especially the group life insurance policies offered by many employers.
3. All about the house. It’s tempting to take possession of the marital home especially if you're the one with most custody. But wait. Take a simple division of $500,000 in investments and $500,000 in a house.
Selling a house will cost at least around 5% of the value, so the realizable value is really more like $475,000 and probably less. The investments, meanwhile, have little or no transaction cost.
Investments, especially stocks, will likely grow more than housing especially over the long term. There are a few exceptions in some tight housing markets but it’s rare for property to rise faster than stocks.
Houses are expensive. Upkeep of a house, taxes, depreciation, insurance, repair and utilities can cost anywhere from 3% to 5% of the value of the house. And that excludes mortgage payments. Don't have too much emotional value tied up in the house. And make sure you don't underestimate upkeep costs.
4. Some investments have more growth potential. Or, put another way, not all investments and assets are equal. A $100,000 investment in Apple is not the same as $100,000 Tesla Model X. Don't confuse the two and don’t be tempted to take what looks easier. Investments held in tax-deferred accounts like 401(k), IRAs, and deferred compensation are generally more tax efficient than those held in taxable accounts. But there are tax consequences when you withdraw, and penalties if you’re under aged 60. So, check with a CPA or Financial Adviser.
5. Valuing public and private stock. Some employers offer stock in retirement plans or as part of a compensation plan. Make sure you receive an independent present and future value of the stock if you give up some of your ownership rights.
6. Ensuring continuation of child support and alimony. The requirement to pay either is only as good as the spouse’s ability to pay. So, take out a life or disability insurance policy on your ex-spouse to maintain payments in case something happens. You may have to pay the premiums to ensure the policy does not lapse.
7. Understanding your debt. Any unsecured debt incurred in a marriage is a shared liability regardless of who holds the debt. So, student debt incurred when single but refinanced when married, becomes a joint debt. Same goes with credit cards. It's best to settle all these before finalization of divorce.
8. Valuing Defined Benefit Plans. These typically pay an employee a guaranteed lifetime income at retirement. They're often offered by state or local governments, union or educational employers but there are plenty of companies that still offer them. You’ll need to calculate the present value of a defined benefit plan. This can be tricky and will depend on when it starts, interest rates, income and age. But, roughly, a plan that pays $2,000 a month in retirement is valued from $200,000, if it starts in 10 years, to $480,000 if it starts immediately. Do not underestimate the value of these plans just because they start in the future.
9. Have your QDROs in place. A Qualified Domestic Relations Order or QDRO is a legal document attached to a 401(k), 403(b), 457 or any qualified plan. It orders the plan administrator to pay the non-employee spouse their agreed share of the qualified plan. The payments may not be due for many years so it’s important the new beneficiaries are in place at the time of the divorce. Trying to do them later can be a major headache.
10. All in the details. Ok, this is a catch all. But remember to update the will, any Power of Attorney documents, Advanced Healthcare Directives, investment accounts, credits cards, bank and mortgage accounts, utilities and phones. Anything where there’s a joint name or ownership. And if you haven’t understood or kept track of all the investments and assets when married, now is the time to start. Don't delay. You are now fully responsible.
And a final thought. You’ll need a Financial Recovery Plan after a divorce. Your life style will probably need to change. Check your expenses and budget. And start a savings plan. Even if it's $50 a month. It’s a start and will help you feel in control and that you're building some financial independence.
Running costs of a home
Finding a financial advisor
Check your Social Security status
Spending habits after divorce
Brouwer & Janachowski, LLC
Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice. We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security. The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended. Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data. Past performance is no indication of future results.
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