Families work together and with their financial advisor to build savings for the retirement years they plan to spend together. But when there is a divorce, particularly if it is later in life, those plans change abruptly. The money they have saved now needs to support two households.
The number of couples age 50 and over facing divorce is increasing, and the need for financial planning is playing an even more critical role in those divorce negotiations. What is that role?
Financial planning is the process of identifying goals, gathering data, and proposing solutions for meeting those goals. The same is true of divorce financial planning; it’s the circumstances that differ:
- Identifying goals can be daunting. In fact, it is probably one of the biggest emotional hurdles divorcing parties need to navigate and can be a primary cause of prolonged negotiations. Goals need to be re-envisioned.
- The data collected for the financial plan include the marital assets and debt, which will be shared between divorcing parties.
- The solution should allow both parties to meet their needs with the combination of their portion of the assets and their ability to earn an income.
There are immediate needs to address, such as health care, housing, and providing for children. There are longer-term goals for which each party must re-evaluate their needs, wants, and values, and develop a clear picture of what they can achieve.
Planning plays an important role in this initiative because most people facing divorce typically understand little about what they want or need as a single person. A skilled Divorce Financial Analyst will help their clients paint a picture of what their financial life can look like after divorce. In most cases, it is important that individuals continue to work with a financial planner long after the divorce to help them stay on track with their new goals.
In general, the family assets will be split between parties, but some assets are either difficult to divide or do not meet the financial needs of one or both parties if divided. Examples of assets to be divided include investments, such as property, annuities, pensions, private placements, hedge funds, and stock options. Not every marital asset needs to be split; some can be left intact. The premise behind distribution of marital assets is that it will be “equitable” not necessarily “equal.”
It is important to balance the liquidity of assets with the risk or costs associated with them and the potential income they can provide. It will likely be more expensive to run separate households, so an additional rent or mortgage and the corresponding insurance will affect how assets are divided equitably. As well, the combined cost of health insurance is likely to rise, and the collective utility expenses will be higher than before the split. Divorcing couples need to consider what income or assets are available to cover these expenses and the long-term viability of dedicating those assets to those expenses.
Often, there are limited resources to cover the additional expenses of separate households, so Divorce Financial Analysts must be creative when it comes to constructing options for their clients. An analysis of the liquidity and taxability of the marital assets should include:
- How are assets allocated within the estate?
- Are there marital properties, such as the primary home or investments?
- Are there cash-like investments in brokerage, or are most accounts retirement vehicles like an IRA or 401k?
- Are some assets not currently accessible, such as a pension plan or unvested stock?
The beauty of using mediation or collaboration to resolve a financial dispute is that more time and consideration is given to the financial interests of the parties. A variety of different settlement options are tested for “real world” viability in order to ensure a plan is executable as written. For example, if the plan is to have one party refinance a mortgage, is it possible given their income history? And if not, is there another tax-efficient strategy that could be employed to pay off the loan, such as converting assets like an annuity or a reverse mortgage to income?
When it comes to financial planning, there is no one-size-fits-all strategy. Every family has different priorities and needs, especially when there is a divorce. It is important to take the time to assess both parties’ current and future finances and develop a plan that provides them the ability to sustain equitable lifestyles.
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
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