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Divorce Financial Planning: Tips for a Smooth Process

Updated: May 20

Couple contemplating divorce

Divorce is undoubtedly one of the most emotionally challenging life events anyone can experience.

Beyond the emotional toll, it also brings a host of financial complexities that require careful consideration and planning. As a child of now two divorces and a practicing CPA and CFP who’s helped clients through this nightmare, I can attest to both the emotional and financial pain a divorce can inflict upon those involved.

Whether you’re considering getting a divorce or have already begun the process, establishing a sound financial plan is crucial to safeguarding your future. Divorce financial planning is essential to ensure all aspects are covered. Consulting with a certified divorce financial analyst can provide valuable input, support equalization payments, and assist in complicated settlement issues.

Here are 9 financial planning tips to help you navigate the divorce process and protect your financial well-being.

1. Organize Your Financial Life

In the beginning, it’s essential to organize and collect all relevant financial information, including bank accounts, so that you have a comprehensive view of the household finances. It is also important to consider joint accounts and consult with an advisory team before making any decisions about them. This can include gathering bank statements, tax returns, credit card statements, investment statements, property deeds, retirement plan statements, mortgage statements and any other assets or liabilities you and your spouse own.

Once you have everything gathered and organized, you’ll want to take this data and create a personal balance sheet for your household that itemizes the value of your assets and liabilities. This will provide you with a clear picture of your current financial situation, help in assessing your overall financial health and lay the groundwork for future financial decisions.

2. Understand the Costs Involved in the Divorce Financial Planning Process

Average cost for a divorce in PA

The costs of a financial settlement can be substantial and will vary depending on how you choose to proceed. Understanding the costs involved in achieving the best possible divorce settlement is crucial, as engaging legal counsel will obviously cost more than moving forward amicably without attorneys involved.

Be certain you’re clear on the professional fees involved in your divorce. Even if you don’t elect to hire a lawyer, you may still incur costs down the road should you, for example, hire a realtor to sell a piece of real estate.

3. Consult Qualified Professionals

Divorce lawyers spend a great deal of time helping their clients navigate the legal side of the divorce proceedings which may leave your personal finances unattended.

In addition to selecting a qualified divorce attorney (should you go this route), you should also consider seeking advice from a financial professional such as a Certified Financial Planner (CFP) with experience in planning divorces. A divorce financial planner can develop a strategic plan aligned with your personal objectives, assess risk management and asset protection, provide input on litigation and settlement support, and gather and assess comprehensive financial information.

It is also important to consult financial advisors for comprehensive financial planning.

To help narrow your search for a CFP specializing in divorce, the CFP Board has a “Find a CFP Professional” search tool that allows you to specify planning services offered by the professional.

Find a CFP search tool

A CFP can help you identify what-if scenarios for your settlement options, evaluate the tax implications, and create a post-divorce budget. They can also assist in simplifying complex financial matters and ensuring you make well-informed decisions that protect your financial interests.

4. Assess Your Financial Needs and Goals

Cash flow analysis

It’s likely your lifestyle and financial goals will change post-divorce. As such, you’ll want to review any major changes that will likely occur as a result of your divorce. This could include significant changes for you, both personally and financially, including changes in housing, employment, alimony, child support along with your spending habits.

The divorce financial planning process is crucial in gathering and assessing all necessary financial information. Being thorough in this process helps ensure that no assets are hidden and provides a clear timeline for gathering required materials.

This may be difficult to put pen to paper when emotions are involved, but thinking through all the financial implications will only help prepare you for what lies ahead. Here are additional factors you may want to consider:

Additional Income and Expenses

First and foremost, you’ll want to account for changes to your budget as a result of the divorce. Alimony and child support payments can have a major impact on your financial future and it’s important to assess how these payments will affect your budget.

Cash Reserves

Next is building a comfortable cash cushion for emergencies and other unexpected costs. A good rule of thumb is to maintain anywhere between three and six months’ worth of living expenses in cash.

Spending and Savings

With child support and alimony accounted for, you’ll now be able to create a financial budget. Here’s a simple rule of thumb to help get you started: 50/30/20. That is, 50% of your net income set aside for base living expenses (i.e. housing, utilities, child support, insurance, etc.), 30% towards savings and the remaining 20% for discretionary spending.

Investment Mix

It’s also a good idea to have a firm grasp on your investments, specifically how your money is allocated among stocks, bonds and other asset classes. This will help ensure your investment strategy aligns with your financial goals and risk tolerance.

5. Protect Your Credit Score

Credit score

A divorce can have a detrimental impact on your credit score, especially if shared debts aren't managed appropriately. As such, you'll want to pay close attention to your credit score and monitor it regularly.

Sites like Credit Karma allow you to access your credit score for free and view open credit accounts in your name.

With a comprehensive view of your outstanding debts, you can then work with your financial professional and/or attorney to determine how to address joint credit accounts and avoid being held responsible for your ex-partner's financial decisions.

6. Analyze and Divide Assets Strategically

The division of assets can be one of the more complicated and contentious steps within the divorce process.

A Qualified Domestic Relations Order (QDRO) can be used to divide retirement assets, facilitating the transfer of a portion of assets in a workplace plan or IRA to an ex-spouse's retirement account, allowing for direct transfer and potential withdrawal without penalties.

Work with your attorney and financial professional to determine the true value of your assets such as retirement accounts, pensions and real estate while paying close attention to illiquid holdings such as a privately held business. Assets such as these are harder to value than publicly-traded stocks that are marked-to-market every second and may require an independent valuation.

You’ll also want to consider the tax consequences of owning your assets now and going forward. In some cases, it may be better to exchange one asset for another (i.e., brokerage account instead of a vacation home) if it’s a better fit for your financial plan.

7. Plan for Retirement

Retirement plan

A divorce can disrupt your plans for retirement and leave you with significantly less than anticipated.

Evaluate the impact of the divorce on your savings and retirement assets and lean on your financial professional to build a successful retirement plan that encompasses post-divorce changes to your finances.

8. Protect Your Financial Future

If alimony or child support are mandated as a result of the divorce decree, life insurance policies may be required to satisfy those support payments should something happen to you.

Additionally, it's important to consider the cost of health insurance for your children when calculating child support payments, as courts take this into account.

Work with your financial professional to help you find an insurance policy that’s best suited to meet your family’s needs at a reasonable cost.

9. Update Estate Planning Documents

It's easy to overlook your estate plan when going through a divorce as other financial matters tend to take precedence over updating beneficiary designations or re-drafting a will.

Make sure to review and revise your estate planning documents, such as wills, trusts, and powers of attorney, to reflect your new wishes and beneficiaries.

Final Thoughts

Navigating through the divorce process can be challenging and stressful.

Having a well-thought-out financial plan can help you secure your financial future and embrace a fresh start.

Post-divorce financial planning is crucial in securing your financial future, including reevaluating emergency funds, updating estate plans, creating a new budget, reassessing investment portfolios, updating insurance policies, reviewing tax planning strategies, and updating estate planning documents.

Collaborate with financial professionals, be open to compromises, and stay focused on your long-term financial well-being.

While a divorce marks the end of one chapter, it also opens the opportunity to build a brighter and more financially stable future.

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Image by Aaron Burden


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