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June 22, 2016 at 05:57 AM
With all of the negotiations, arguments, threats and exasperation that come with a divorce, when finalized, many recently divorced spouses are faced with issues they haven’t had to deal with for years or even decades. We are not talking about rejoining the dating pool, but dealing with one’s own financial affairs. To quote a Peter Allen song, “Everything old is new again.” Re-establishing personal credit, paying bills, dealing with investments and getting ready for taxes can prove frustrating. This frustration will be felt by both parties, maybe not equally, but both will feel it and, inevitably, each will have to fill in where the other has left off. As professionals in the family law arena, it is incumbent upon us to properly advise our clients, not only helping guide them through the divorce process, but preparing them for their new life after their divorce.
Throughout this article, various financial issues each divorced person will face—and, likewise, the professionals—are highlighted. Some will have been handled during the proceedings, such as opening a checking account, getting a new credit card and paying bills. From experience, we have learned that even the simplest task to one party may feel insurmountable to the other. We have broken down the issues into seven areas, adding a reminder regarding cohabitation. The remainder of the article is written as if the reader is one of the parties to the divorce and not the family law professional.
Day-to-Day Finances
Typically, one spouse takes care of the mundane task of paying bills. If that was your former other half, you need to set up a system so bills get paid timely. If you are somewhat computer literate, a program, such as QuickBooks, can help with the recordkeeping. It may take a little getting used to, but is well worth the time and effort. As an aside, many community colleges and adult schools offer courses for learning QuickBooks. Of course, you need to understand the cash flow process, which simply is how much money will be coming in and how much is expected to get spent each month.
Budgeting
When anyone first hears the word “budget,” thoughts of scrimping and saving immediately come to mind. However, there are huge differences between living on a budget and creating a budget on which to live. It doesn’t have to include every dollar, just provide a framework. Include fixed expenses, such as mortgage or rent, mostly fixed expenses, such as utilities or gym memberships, and variable expenses, such as food and entertainment. We tend to use Microsoft Excel to create budgets, which, for basic spreadsheets, is easy and effective. List each income and expense item, limiting it to cash flow items. For example, if you receive interest or dividends on investments, but don’t use them on a monthly basis, don’t include them in your budget. On the expense side, estimate amounts to be paid each month. Regarding loans, start by using the minimum required payment. Amounts can always be increased if there is an excess of cash inflows over outflows. While it is not expected that anyone will stick to their budget, it provides a way of understanding your cash flow. For the first several months, we recommend that you compare inflows and outflows to your budgets. If anything is significantly off base, adjust it. Remember that your budget reflects your lifestyle and its purpose is to help with money management.
Investment Management
If you are fortunate to have received investments through equitable distribution, decision making is inevitable and difficult, even for a seasoned investor. If you are comfortable with the prior investment manager, ask him/her to discuss your needs and goals, both current and long-term. If you are the least bit uneasy because of the prior relationship between the investment manager and your ex-spouse, we recommend interviewing several investment advisors, asking each how he/she would invest your money. Then choose the one with whom you feel most comfortable. In addition to discussing your needs and goals, discussions need to consider risk tolerance and personal feelings about certain industries. Remember, it is your money and you have the final word. Pensions & Retirement Plans
Whether you had your own plan during the marriage, received a portion of your spouse’s account through a Qualified Domestic Relations Order (QDRO), or have no retirement plan, you need to prepare for your retirement. Even if you do not work, but collect alimony, you are allowed to contribute to an IRA or Roth IRA. There are several differences between traditional IRAs and Roth IRAs. While contributions to a traditional IRA are tax deductible, contributions to Roth IRAs are not. New Jersey doesn’t allow the deduction, so it is not a factor. The second important difference occurs upon withdrawal. After reaching retirement age, amounts withdrawn from Roth IRAs are not subject to income tax, whereas amounts withdrawn from traditional IRAs must be allocated based on the total amount contributed and the appreciation on it. While alimony may be for life, once the payer stops working, it is likely that it will be reduced. One of the best ways to protect yourself and supplement your income during yours golden years is with retirement accounts.
Social Security
This is one of the most complicated areas, even without getting divorced. There are over 2,700 rules governing retirement benefits and over 500 possible filing strategies available to a typical couple. For the divorced person, who did not work, claiming Social Security benefits through a former spouse’s earnings is available given certain parameters. The couple needs to have been married for over 10 years, both spouses must be over age 62, and the applicant seeking benefits cannot be married at the time of the application. Of course, there are a lot of other rules and factors, but it is important to know that you still can collect against your former spouse’s account without affecting the amount that he/she will receive.
Estate Plans
