Financial Reality for Divorcees
There is a distinct difference between representing a man in a divorce and a woman in a divorce. Most men will say, “Whatever happens, don’t let her get my retirement.” Women say: “Whatever happens, I want the house.” While people are free to set their own priorities, keeping a house (particularly for emotional reasons) can be almost catastrophic and usually ill-advised.
There are fewer and fewer “traditional” families out there if “traditional” means that the husband works to support the family, and the wife takes care of the children and household. In those days of yore, it was not uncommon for the man to take care of savings, investments, and bill-paying. Often, an older woman getting a divorce did not even know, for sure, what her husband earned. Even in today’s world where both spouses usually work, there can be a lack of information about what each party is spending and what each party is earning.
After the divorce, most divorced men will make more than their ex-spouses. This may be due to a disparity in education and/or lack of experience and/or continuing discrimination in the workplace. Many women still take time off from work to raise young children, and they are economically and actually disadvantaged when they re-enter the workplace. After the divorce, a woman’s income is likely to consist of her own earnings; child and/or spousal support; and investment income if any.
And that is the very first point to this article. Income and assets are two different things. Income can vary and increase. Assets are fixed and often have related expenses (like property tax, insurance, and maintenance on a former marital home). If you “spend” your assets, they’re gone.
The best thing to do even before a divorce becomes final is to develop a budget (either alone or aided by a professional). In one column, you will identify your monthly income. In the next column, you will identify your expenses on a monthly basis. Hopefully the two columns will match. If there is, however, insufficient income to pay expenses, there are only two choices:
- Increase income; and/or
- Decrease spending.
There are many women who have not worked outside the home in a long time, or ever, who cannot imagine a way to increase their income and who can also not imagine how to decrease spending. If they don’t increase income and/or decrease spending, then their only choice is to dip into savings or liquidate assets to supplement insufficient income. This might work for a few months or a few years, but that choice is patently unwise. At some point, the assets will be exhausted and/or spent, and it is possible that earned income may decrease or cease because of a lost job or a disability. These folks look like the lottery winners you read about. They lead a good life for a short time and a bad life for a long time.
After a divorce, it is imperative that both parties re-assess their goals and resources. Everything has changed. For example, instead of having access to all of an ex-spouse’s income, a court may order a limited amount of spousal support (which is taxable) for a limited period of time. If child support is ordered, that will end when the children turn 18 (in most cases). In today’s world, spousal support is likely to be “rehabilitative” and not “permanent.” Spousal support is there to subsidize lower income when a recently divorced person re-enters the job market or returns to school. Spousal support is not intended to fund a lifestyle that cannot be sustained on the income available.
The best thing to do is to identify assets whose appreciation (or increase in value) is more than the associated expenses. For example, if a $200K house is expected to appreciate by 4%/year (or $8K), that increase in value has to be compared to the $6K/year property taxes; $1200/year property insurance; $1000/year maintenance cost; and the possible net $8K in mortgage interest expense (after interest is deducted on a tax return). Houses usually cost more money than they “return” on the investment. If a wife is intent on keeping a house, not only will she pay high carrying costs over time, but then when the wife sells the house, she will pay closing costs and a real estate commission (which could be $14K on a $200K house at 7% commission). Meanwhile, if a husband has kept his retirement, the husband is earning money through market appreciation (with little to no effort on his part), and his earnings on retirement are all tax-deferred.
There people “out there” who have obtained training and education on how to counsel divorcing or divorced people. For example, there is an Institute for Divorce Financial Analysts who trains professionals to assist divorcing clients with how to identify separate property from “marital property”; how to value and divide property; how to distribute retirement accounts and pensions; how to address tax issues; and/or how to develop a realistic budget. People like this may be available to testify as an “expert witness” in a divorce case, especially when it comes to the need for spousal support and/or the length of time a spouse will need spousal support. There is also an Institute for Certified Divorce Planners (ICDP), which is likewise a resource.
During and after a divorce, a client has many options: to work or not to work; to keep a house or sell it; to stay in a community or move; to return to school or not. Almost all decisions have a potential “benefit”—but they also have a “cost.” A client can generally see a range of benefits that could be associated with various options, but he/she may not unable (or willing) to consider the actual cost of the option. This is where a professional with special training in divorce can be worth his/her weight in gold. Expect to pay on an hourly basis—as much as $150/hour. You might end up spending $1,000 or $2,000—and hopefully you will avoid losing $10K to $100K. You decide.