When you exchange rings and say “I do,” the last thing on your mind is the word divorce. Unfortunately, lots of people go through this life-altering experience. It can leave you feeling raw, confused, angry and fearful. Everything in your world feels upside down, including your financial situation.
Trying to navigate financial waters after a divorce can feel overwhelming, and I know it’s tempting to avoid dealing with dividing your assets, including your retirement savings. But you can’t avoid doing those things, or you’ll be at a disadvantage later on.
First Things First
Before you start working on specific money issues, you need to do a few things.
1. Get an experienced divorce attorney. Don’t believe all the stories about divorce lawyers being ruthless sharks. Because of their experience, they can help you and your spouse split your assets fairly.
2. Close all joint credit accounts. This sounds harsh, but there’s a reason. Even if your divorce is amicable, situations can change quickly. You don’t want to get stuck with your spouse’s binge spending on a shared credit card.
3. Get a credit report. This will tell you if your spouse has taken out a line of credit without your permission or knowledge. Unfortunately, many spouses have no idea that their partner had a separate bank account or signed up for credit cards.
4. Gather paperwork. To divide assets, your lawyer (and possibly a judge) will need to see your financial statements, income tax records and investment portfolios. Gather everything that relates to your finances. If you’re missing something, just call the appropriate office and ask for help getting a copy.
5. Take pictures of valuables. Occasionally one spouse may hide or take items of worth like art, coins and jewelry before you’ve had a chance to talk about who will keep them after the divorce. The pictures are visual proof of what you own.
These may seem like unnecessary steps, especially if both of you agree that it’s time to part ways. However, when emotions are involved, the situation could change on a dime. You don’t want to be caught off-guard.
Dividing Your Assets
Now that you’ve taken some preliminary steps, you can make better decisions about dividing assets. Money in checking, savings, and similar accounts can be split fairly easily. However, when it comes to other finances (including retirement savings), coming to an agreement can be a little tricky. Here are a few things to keep in mind.
1. Get it in writing. Even if the two of you are on friendly terms, the courts still require a legally binding document. A handshake won’t be enough.
2. You could be awarded retirement money. If your spouse has significantly more money in retirement savings, part of that money can be transferred to you. Your lawyer will need to file a legal document called a qualified domestic relations order (QDRO) for you to receive that money. IRAs, public pensions, military benefits, and other accounts require different paperwork.
3. Not all retirement accounts are equal. A traditional IRA of $10,000 is not the same as a Roth IRA of the same amount. Why? With a traditional IRA, you’ll pay taxes when you take money out at retirement. That’s because you paid taxes on that money before you put it into the account. The same applies for a Roth 401(k).
4. Don’t forget the pensions. You may be entitled to a portion of your spouse’s employee pension. However, some state retirement pensions can’t be divided at divorce, so make sure you receive something of equal value. You may also be eligible for the money even after the spouse’s death, so make sure you find out.
5. Don’t automatically take the house. I know, you’ve created a lot of memories there, but taking the house as a part of the financial split may not be the best move. Remember, even if the house is paid off, you still have to pay for repairs and taxes, not to mention utilities and upkeep. It may be better to sell the house and split the money.
6. You may be eligible for Social Security benefits—even if you didn’t work. If you stayed at home with the kids while your spouse worked, you could still be eligible for some Social Security benefits if you were married 10 years or more. As the divorced spouse, your benefit is equal to half of your ex-spouse’s full retirement amount if you start receiving benefits at your full retirement age. If you worked, you can take Social Security based on your salary or your ex-spouse’s, whichever is higher. But you can’t claim both.
Now That You’re in Charge . . .
Once the divorce is final and the assets are divided up, you’re solely responsible for your finances. It’s important to create a monthly budget as soon as you can. Prioritize housing, transportation and food. Then work on building your emergency fund and paying down any debt. When you’re ready to start putting away money for retirement again, talk to a financial pro who can help you develop a plan.
Divorce is a huge life change, but you can recover and rebuild your life. Step by step, one day at a time, you can get back on solid financial footing and work toward your retirement dream! Don’t give up!