Untying the Financial Knot After Divorce: How to Set an Optimal Economic Course
On the Holmes and Rahe stress scale, which predicts the probability of illness based on recent life events, only the death of a spouse is considered more stressful and more likely to lead to physical illness than is divorce. For many reasons—from the psychological and emotional to the practical and financial—divorce is nearly always extremely challenging for everyone involved. And for the non-wage earning spouse, finding personal and financial balance can be particularly challenging.
The Chinese character for ‘crisis’ is comprised of the symbols for both ‘danger’ and ‘opportunity.’ In other words, divorce constitutes both great challenges and also great opportunities – ones that can see you ending up stronger, happier, and better prepared for the future than you might have ever imagined. However, to convert these challenges into opportunities, and to make success much more likely, it is imperative in most cases that you don’t try to go it alone; instead, seek appropriate assistance and support wherever and whenever you need it.
For example, with the right kind of emotional support, be it from friends and family or mental health professionals, you can much more easily and gracefully move through the trauma you have experienced and establish a new identity and an emotionally satisfying social life. Similarly, if you find the right kind of financial support—for example, a financial advisor experienced in and dedicated to understanding, assisting, and educating recently divorced women—you can reestablish yourself in a pragmatically grounded life trajectory that will attend to the immediate needs before you (and your children, if any) and take you into retirement.
Some Crucial Divorce-Related Financial Facts
First, it’s important to realize that divorce almost always results in a lower standard of living for the family. From paying for food and cable to paying for living quarters and vacations, where there used to be one outlay there will now be two. With the many efficiencies of living together as a family no longer present, and with the many costs of getting to a divorce agreement and finalizing the paperwork a substantial financial drain, divorce inevitably results in everyone involved being poorer after the fact.
Second – and this can be a particularly hard fact to swallow – even a good, fair, collaborative settlement will often leave you, the non-wage earner, with less money than you need to comfortably maintain your pre-divorce lifestyle and prepare for the future. This is especially true if children are involved, regardless of the size of alimony and child support payments. For example, suppose $1,200 a month is awarded as child support for one child. In some months that may be enough, but in other months it might not be nearly enough, and you will no longer have your spouse’s (usually larger) paycheck to turn to. Additionally, while you are expected to find employment in an expedited time frame, some divorce settlements don’t take into full account the cost of additional education and training.
Third, if you have not been in charge of the finances, you may be ill-prepared for the financial and financial-related head-of-household responsibilities. This can include everything from handling household and automobile maintenance to overseeing investment portfolios and, in some cases, even paying bills and balancing checking accounts. Additionally, you may be ill-equipped to run down and follow through on important financial details and legal details such as the retitling of assets, confirmation of access to online banking and trading accounts, and the revision and redrafting of key estate-planning documents (wills, trusts, legal and medical powers of attorney, etc.).
Finally, in major metropolitan areas such as the Bay Area, the financial centrality of the house cannot and should not be underestimated, especially because it tends to warp decision-making in unsustainable ways. It’s quite typical for one spouse to have a strong attachment to the house they have lived in and to want to hold on to it at all costs. This is easy to understand, especially when children are involved – children who love their rooms, their schools, and their friends and who may have never known another home. Undertaking a rational assessment of whether the house can be held on to without the higher wage earner’s income in the picture – and whether it’s worth holding on to, given the expense of maintaining it vis-à-vis all the other financial needs that will arise – is absolutely crucial. Often the house simply can’t be held on to, and in many cases it simply shouldn’t be held on to.
Three Criteria for Finding the Right Financial Advisor
Finding the right financial professional can itself amount to a substantial challenge. Unfortunately, far too few financial advisors are truly client-centric—that is, dedicated to providing their clients with the kind of comprehensive advice and financial services that will make a real difference in their lives. The following three criteria can help you identify the right financial professional.
First, you want someone who is an understanding, patient, and effective teacher. You want to work with someone who is aware of how difficult divorce is and who will help you take small, concrete steps in the right direction as you build a new foundation. You don’t want someone who will pat you on the head and say, “It will be OK, I’ll take care of everything from here.” Even if that were possible, it wouldn’t be advisable, because part of what you need to do now is learn to master your finances for the long run. Seek out a financial professional who finds it satisfying to teach you new things and watch you rise to the occasion to apply what you have learned.
Second, you want someone who understands and embodies the basic tenets of comprehensive wealth management. Look for a financial advisor who starts with long-term goals, needs, and dreams and works backward from them. Your advisor should follow a consultative process, and he or she should understand the value of a team approach – that is, someone who works with a network of professionals that can help evaluate and work through everything from mortgage and real estate needs to insurance and estate planning. Also, you want someone who takes a conservative financial approach and follows the principles of investing your money intelligently without promising “big returns.”
Finally, seek a financial advisor who comes well recommended by others you know and who is experienced in working with divorce. Some things can be learned only by actually doing them, such as how to tell a client that she/he can no longer afford to do certain sorts of things – for example, going on a multiweek Hawaiian vacation every summer – in a way that the client can hear without feeling utterly defeated. A financial advisor who is a compassionate, effective, and realistic advocate will come to know you well enough to be able to lay things out for you in understandable terms while providing a meaningful and ultimately encouraging perspective.
Building a New Life for the Long Run
Ultimately, look to identify and work with a financial advisor who understands what you need and who is dedicated to helping you achieve it. To find this person, you will have to trust your head, your heart, and your gut: Is this the right financial professional to help me (and my children, if any) get on the right track financially for the long run? Is this the kind of person who can help me separate those decisions that have to be made immediately – even if I feel I’m not ready to make them – from those that can be made in a few weeks, months, or years? Is this someone who will look me in the eye, always tell me the truth, and always encourage me to learn more and become better able to face whatever the future brings?
While the personal and emotional aspects of divorce are typically the most difficult, the financial aspects often come in a close second. For starters, make sure you take all of the following steps:
Recognize how universally financially difficult divorce is for everyone involved.
Familiarize yourself with the four crucial financial facts laid out in the second section of this article.
Commit to finding a financial advisor to work with – you really don’t want to go it alone – and consider the three criteria laid out above in your search.
Be prepared to do the necessary work to live the life you want for yourself and your family for the long run.
Few things are harder than divorce, which is exactly why it’s important to find ways to optimize your immediate and long-term financial situations. When you find a financial advisor who understands what you’ve been through, who follows a comprehensive process, and who will be your realistic yet creative advocate, you will have taken one of the most important steps toward rebuilding and re-creating your life.
For a complete version of this original article, see – http://www.ameripriseadvisors.com/jamie.g.hargrave/