Seven Financial Tips for the Newly Single
Does the Love Boat have a lifeboat? I wish I knew. I once had a young friend who was doing housework one weekday afternoon. She was humming along to the radio when she received a strange text message from her husband.
She texted back promptly, “Huh? Sorry for what?” There was no reply.
About fifteen minutes later, her doorbell rang. She opened the door and, to her complete shock, she was served with divorce papers. She was blindsided and totally devastated. Failed marriages, alas, are all too common in our day. Divorce is a difficult subject and there are no easy answers.
First, I will say, I encourage people to stay together whenever possible, but what if that ship has sailed? What does a person do when a marriage, through no fault of their own, ends abruptly? I am neither an attorney nor a marriage counselor. However, as a financial advisor, I do caution people to avoid the most common financial mistakes made in the aftermath of a failed marriage. Here are seven survival tips for the newly single:
1. Alimony is both taxable and tax deductible, depending on who you are.
In brief, if you are the payor, alimony is tax deductible. If you are the payee, alimony is taxable. As a rule of thumb, alimony recipients should set aside 20% for taxes. Likewise, do not confuse alimony with property settlements or child support. Only alimony is taxable (or tax deductible as the case may be). Property settlements and child support are not.
2. Avoid cashing in your qualified retirement plan.
When bills pile up, it is tempting to dip into a 401(k) to stay afloat. Try to avoid this. It hampers long term growth and often creates sizable tax consequences. Again, if you must, be sure to instruct your custodian withhold 10-20% for federal taxes to avoid taking a nasty tax hit in April.
3. Update your beneficiary designations as soon as possible.
If you named your former spouse as an IRA or life insurance beneficiary, chances are you want to change that as soon as possible. Likewise, if there are any Powers of Attorney floating around, such as a medical POA, it would be a good idea to revoke those from any adverse party(s).
4. Avoid foreclosure and protect your credit score.
A home is the largest investment many of us will ever make. If you own your home but cannot make the payments by yourself, prepare to sell your home as quickly as possible for fair market value.
If for some reason selling the home is genuinely not an option (for example your mortgage is “under water”) and you are facing foreclosure, you have options. Your lender may be willing to accept a quit claim deed in lieu of foreclosure. By surrendering the home voluntarily, you can protect your credit score, thus making it easier to purchase a replacement home in the near future.
5. What is a QDRO and why should you care?
A Qualified Domestic Relations Order, simply put, is a judgment or court order that awards an alternate payee (usually the former spouse) all or a portion of a retirement account. These are usual sizable distributions. Does the payor get stung with the usual 10% early distribution penalty if he/she is under age 59 1/2? Fortunately, no. Be aware however, if you receive a QDRO settlement, you should consider rolling these funds into an IRA within 60 days, to avoid unpleasant tax consequences.
6. Are former spouses still entitled to Social Security benefits?
Social Security is a complex topic, but the short answer is yes. If you were married to your spouse for ten years or more, as of 2017, you are still entitled to Survivor Social Security Benefits.
7. Meet with a financial professional to protect and rebuild your portfolio.
Meeting with a financial professional can help restore objectivity and keep emotions in check. Draft a new household budget. Update your asset allocations. Set new investment goals. Review your portfolio to make sure you are on track to meet those goals
Keep a level head. Some separations are amicable. Others are not. The important point to remember is think about tomorrow. Separation can be hurtful and it is human nature to want to hurt the people that hurt us emotionally. Unchecked, these emotions can be very counter-productive financially.
In property settlements for example, it is not uncommon for former spouses to adopt a “scorched earth” policy. For instance in one case, a judge ordered the husband to sell their home and give his wife half the proceeds. He complied. He sold the home, with a fair market value of about $300,000, for one-dollar and promptly delivered fifty cents to her. In another instance, a judge ordered a wife to sell the Porsche and surrender half the proceeds to her husband. She complied. She sold the car to the first teenager she could find. The Porsche had a fair market value of about $80,000. She sold it for $100 and delivered $50 to her husband. Believe me, I understand but I do not agree. The decisions described above were clearly driven by emotion, not mathematics. Not to mention, selling assets below fair market value often generates gift tax consequences. No financial advisor in their right mind would say these two individuals acted in their own best interest.
The point is stay level headed. Put aside vengeful thoughts and focus on your future financial welfare. You will be much better off down the road. The sun will come up tomorrow. Life happens. When it happens to you, leave yourself in a good financial position and make a fresh, clean start.
-Michael Angell, CFP®, EA