Making the Most of a Divorce Settlement
Many women find themselves unprepared to turn this ‘Sudden Money’ into financial security.
Although nearly half the marriages in America will end in divorce, few women are prepared when they must cope with the emotional and financial stresses they face during and following a divorce. It’s unfortunate that people have to make financial decisions that are critical for the rest of their lives in a period when they are so emotionally upset. It is entirely human for your decision-making abilities to be overwhelmed by the pain, anger, sadness, and grief that almost always accompany divorce.
Sarah, for instance, was so devastated to learn that her husband had been cheating on her for years that she went on a $100,000 spending binge in a futile attempt to make herself feel better. She felt she deserved a new wardrobe, a new car, and several luxurious vacations to start her new life. However, she did not realize that after her divorce her standard of living would not be what she was accustomed to. Once Sarah realized the reality of her situation she stopped spending recklessly, but it took several years to pay back her debts.
A spending binge can hurt your financial situation for years to come. And unfortunately, if you are spending your lump sum divorce settlement those dollars frequently cannot be replaced. Lump sum settlements are meant to be used to secure one’s retirement, when alimony and child support payments have frequently stopped. Spending this money can have severe repercussions many years in the future, but it is hard to be conscious of that during a painful emotional time.
Declare a ‘Decision-Free Zone’ in which you defer making all but absolutely essential decisions until you have worked through the ‘Chute of Emotions’ inevitably attached to such a life-changing event. This includes investing and spending decisions.
Get organized, whether you feel like it or not. Secure all of the papers you will need to determine the value of marital assets. Organize and complete the paperwork that cannot be put off. If you have been awarded a portion of your husband’s retirement benefit, for example, many companies and government agencies require that the necessary paperwork be completed by a set date. File late and you may become ineligible to receive money you were counting on. Don't delay taking the steps necessary to change names and beneficiaries on your will, trusts, insurance policies, annuities, retirement plans, credit cards and brokerage accounts, even utility bills.
Divorce is a tough transition. Making the transition successfully takes time, planning and the willingness to face the reality of your altered circumstances. All too often, people hire an attorney and assume that she or he can take care of everything for them. But once a divorce settlement is reached, the attorney typically leaves the picture, and you are on your own, often feeling alone and afraid.
As a financial planner who specializes in advising recipients of Sudden Money – through divorces, inheritances, retirement, stock options, and insurance settlements – I see the same legitimate fears in almost every client during and immediately after divorce. Will I have enough money to live on? Do I understand enough to make the right investments? Even if my investments are sound, will my money run out some day? My goal is to guide her clients through the process, so they can feel confident about addressing those fears.
Following the steps recommended in the Sudden Money Program™ gives you a rational plan of action. The first six items on the Divorce Checklist are:
- Find a reputable divorce attorney,
- Establish your own checking and savings accounts,
- Cancel joint lines of credit and credit cards,
- Review, and if necessary, change your retirement plan and insurance policy beneficiaries,
- Hire your own accountant, and
- Consult a qualified financial adviser (probably not one you shared with your soon-to-be ex-spouse).
Don’t wait until your divorce is finalized before you take steps 5 and 6. You will need to create a realistic new budget, retirement savings plan, will and estate plan. Most importantly, if you know your financial options at the outset of settlement negotiations, you'll be in a better position to get what you need and make the most of whatever assets you take away from the marriage. Few people realize, for example, that while alimony payments to you are taxable as income, a lump sum divorce settlement is not. You may be better off with a lump sum that you can invest to provide monthly income.
How much should that lump sum be? I suggest doing a Reality Check with your financial advisor to find out. What will it cost to live on your own? How will you finance your retirement? By doing this kind of analysis before your divorce, you will have a good understanding of your new financial goals and options. Sharing this information with your attorney can be of critical importance. When your divorce is finalized, if you receive a lump sum payment, you will be better prepared to enter Phase II of the Sudden Money Program™ – implementation of your new financial and investment plan.