Divorce affects your mental well-being, your physical health, your stress levels, your children, your finances and ultimately your future. With nearly half of all marriages coming to an end, it’s no wonder the divorce industry is hugely profitable. Can your finances handle a divorce?
The average cost of divorce sits right around $15,000, and this doesn’t include your retirement plan or any monthly costs associated with the divorce, such as child support or spousal support. Though there are numerous ways to go about getting divorced, be prepared to spend some money. This is especially true for couples who cannot come to an agreement. In the long run, you may need to spend more in order to save more long-term.
Financial adviser Nicole Middendorf, CDFA, author of Lipstick on the Piggy Bank, discusses the four basic things you need to financially survive a divorce: a place to live, little to no debt, liquid money and retirement assets.
A place to live: “A house is not a liquid asset, and if you look historically at the stock market, a house may have less appreciation potential compared with money set aside for retirement. This is where it is very important to establish a financial plan,” says Middendorf. “Depending on the divorce, it may be advantageous for one spouse to take the home, while in another situation it could be a disadvantage for the spouse to take the home.”
Tip: If your home is worth more than you owe, it may be in the best interest of both parties to sell it and split the proceeds. This way, you’re both free to downsize, rent or move if you so desire.
Little to no debt: “If there are credit cards that have a zero balance, call and cancel those cards,” states Middendorf. Open new ones in your name only. Debts with your name on it belong to you, even if your spouse is responsible for the charges.
Liquid money: In order to pay for the divorce, you’ll need liquid money. One method of receiving this money is through a life insurance policy. “If your soon-to-be ex-spouse is the sole beneficiary, you may decide that you want to sell the policy in a transaction called a life settlement. This may net you a nice sum of liquid money that can be used to finance your newly single status,” Middendorf advises.
Retirement assets: When dealing with retirement, every account counts. If one account can’t be divided (for example, a pension), take more from a different account, such as a 401(k). “If you receive retirement assets from your spouse’s 401(k) plan, you may need a QDRO (Qualified Domestic Relations Order) to separate those assets. The QDRO is a legal document that is separate from your divorce decree,” she explains. “It instructs the benefits department of the 401(k) plan provider how the assets should be divided. Make sure the QDRO is written correctly before the divorce is final to ensure that you receive your retirement assets.”
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