A divorce affects budgets, retirement planning, and how you protect loved ones.
Going through a divorce can be challenging on a number of fronts: emotionally, mentally, and financially.
Take the financial impact and its potential outward ripples. Post-divorce, household income tends to fall about 10%.
But there are steps you can take to help rebuild, protect, and strengthen your financial foundation after a divorce. Here are key areas to focus on.
The division of assets is probably the biggest financial obstacle to overcome before your divorce is finalized. Those assets include not just physical property such as a home or car, but financial assets including bank accounts, investments, and retirement savings (more on that below).
States generally set their own guidelines for how assets may be divided during a divorce; most are what’s called equitable distribution states. In these, assets are distributed equitably, not equally, based on the couple’s circumstances and other factors. Nine states use community property, with an equal division of assets as the basis for splitting assets in a divorce. Lastly, divorce mediators or judges will also consider what’s called separate property; these are assets that each member of the couple accumulated before a marriage. In general, separate property is not divided during a divorce.
Once you have a better understanding of what your post-divorce assets are, you’ll likely be able to tackle some of the next pieces of your financial picture.
Family income tends to drop post-divorce, with the difference more profound for women than men.
“It may feel like there’s a mountain of work that comes with the process of separating your life from someone else,” says Heather Winston, financial professional and product director for Retirement and Income Solutions at Principal®. She suggests a conservative budget (try this budget worksheet PDF) as you transition into your post-divorce finances.
One thing that’s important to include, says Winston, is an emergency fund to help with unexpected expenses. It’s a financial safety net that you can add to, over time, as you’re able.
If you or your ex-spouse saved in retirement accounts while married, those financial assets may be affected by your divorce decree. The specifics are going to depend on factors including your situation and your state’s laws.
If you end up entitled to a share of your ex-spouse’s retirement savings, you may need to assess whether those savings provide a base to build on through the rest of your life. On the other hand, if your retirement savings were divided to share with your ex-spouse, you may need to re-evaluate your savings rate and retirement plans, including when you stop working, in order to rebuild what you need.
“Divorce could push out your expected retirement date or require you to save more than you had been to stay on track,” says Winston. “This is an opportunity to reexamine what your retirement will be and how to fund it.”
Both spouses in a divorce must file a qualified domestic relations order, or QDRO, that formalizes how retirement savings like 401(k)s are to be divided and where the funds are directed. It also allows retirement funds to be moved without the typical 10% early withdrawal penalty. A QDRO is not used with any IRAs, however; what happens to them is part of the divorce decree.
One potential retirement income source to consider: Depending on the length of your marriage, you may be entitled to Social Security benefits for divorced spouses. A financial professional can help sort through your situation.
A divorce means rethinking the legal documents and wishes you have for the money you’ve saved and your assets. Consider:
- Updates to your will and estate documents, including any health care-related documents.
- A review of the beneficiaries on all your policies and accounts, including life insurance and annuities. Remember: Beneficiaries remain in place for policies, no matter your wishes in a will, so it’s important to keep them current.
- A check on benefit levels and insurance, including how much disability insurance you need to be able to provide for loved ones.
Post-divorce, it’s helpful to evaluate any changes to your official identity and access to any sensitive financial information.
For a name change, you may need a court order for certain types of accounts. (Your attorney can offer insights.) Other legal documents or agencies to update include the Social Security Administration at ssa.gov, your state’s driver’s license bureau, and your passport at travel.state.gov.
You may need to open new bank accounts and credit cards or lines of credit, as well as close old joint accounts. (You can find a list of the latter at annualcreditreport.com. You may also need to update your mortgage deed (do this through your county recorder) or refinance a mortgage, too.
Insurance, including property, vehicle, and health, will probably need updates. Finally, ensure you change any passwords that may have been shared between you and an ex-spouse.
While you probably already have a divorce lawyer, you may want to add tax and financial professionals to your team, too. A divorce settlement may impact your current year's taxes, and your future withholding may change as well. A financial professional can assess what retirement savings you currently have and how you can create a plan to keep your post-work goals on track.
Ending a marriage comes with so many considerations, and your post-divorce finances are one piece of your life puzzle, Winston says. Her tip: “Avoid immediate, knee-jerk decisions. If you’re emotional, set things aside and come back to them. But do come back. It will take time and effort to match who you are now with your new financial life.”
To update beneficiaries on your Principal accounts: Start by logging in. On the left menu, click the box of the account to review. On the top menu, click “Overview,” then scroll down to “Beneficiaries.” Follow the on screen prompts to add or edit beneficiaries.
