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June 6, 2000 MSNBC
How to
rebound financially when on the rebound
in your relationship |
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By Jean
Sherman Chatzky
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| It's sad
to say but nearly half the marriages in the United States don't make it ''til death do us part' which leaves a lot of us
confused, including financially. So what do you do when your marriage is over and you have to rebuild your own financial portfolio'
Money magazine's editor-at-large and 'Later Today' financial contributor Jean Chatzky has some important information on how to
start over and make sense of it all. |
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IT'S NOT EXACTLY
a happy thought: Nearly half of all marriages end in divorce. But facts are facts, so you don't have the luxury of thinking it could
never happen to you, none of us do. And sadly, many women are around to attest that financial hardship often follows divorce. On
average, a woman's standard of living drops by 10 percent, and long term, the economic fallout can be even more devastating: More
than one-fifth of all divorced women live at or below the poverty line.
So it's crucial to quickly establish your financial independence when you decide to split up.
Begin with your divorce agreement, which states your arrangements for child custody and support, alimony, and the division of assets.
(Even if you're using a mediator, as more and more people are today, you should see an experienced matrimonial lawyer before
agreeing to anything. That's true even if you're on good terms with your soon-to-be ex.)
Here are some things to think about when you're negotiating a divorce settlement, as well as
after it is final.
YOUR BUDGET
Before agreeing to child support and alimony, make sure to make an accurate forecast of your
needs. A budget that accounts for your current living expenses is only part of it, because your needs are likely to change. You'll
probably be working more out of the home, for example, so you should budget more for childcare. And remember that you'll no longer
be covered by your husband's health plan, and you may also need more life and disability insurance.
If you need some help with your projections, or with other divorce-related financial issues, try
a new software package called (appropriately enough) Family Law Software. (For downloads and prices go to www.FamilyLawSoftware.com)
YOUR ASSETS
Don't give up everything for the house, especially if you don't have a well-funded retirement
plan of your own. A house is an incredible drain on cash flow, with payments for insurance, property taxes, not to mention unexpected
repairs. In fact, the easiest thing to do is sell it, that way you divorce yourself financially; plus, you and your spouse have two
years to roll proceeds into another home before having to face capital gains taxes. |
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It's not exactly a
happy thought: Nearly half of all marriages end in divorce. But facts are facts, so you don't have the luxury of thinking it could
never happen to you-none of us do.
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As
for pensions and retirement plans, there is a lot to think about. The basic rule is that you are entitled to a cut of your spouse's
retirement plans, usually half of what has been earned throughout the marriage (be advised that it works the other way, too). When
determining the value of IRAs, 401(k)s, Keoghs, and other plans, be sure to factor in the penalties and taxes you'd pay for early
withdrawal. And remember that different plans have different penalties (the penalty for early withdrawal on a 401(k) is 20 percent,
for example, versus 10 percent for an IRA). Also, note whether traditional IRA contributions were made with pre-tax or after-tax
dollars; the latter is more valuable because only the appreciation is taxed upon withdrawal.
Pensions are tricky, because they differ from company to company. Two pensions of equal value may
not be truly equal because of different survivorship benefits, cost-of-living adjustments and lump-sum payout availability. Often
actuaries are called in to do the valuation. You can transfer assets between spouses without withdrawing them using Qualified Domestic
Relations Orders (QDROs), but these are very technical documents, so you need a lawyer who knows what he or she is doing.
INSURANCE
If you receive alimony or child support, make sure that your ex has enough disability and life
insurance to keep up those payments in a crisis situation. You and/or your kids should be named as beneficiaries of that life
insurance.
You should also take out additional life and disability insurance for yourself.
WILLS
Except as required by your agreement, it's important to establish a financial life independent
of your ex. |
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You
may want to change the guardians you've chosen for your children, and you'll certainly want to change the beneficiaries on your
insurance policies and retirement plans.
SAVINGS PLANS
Use an online retirement calculator or consult a financial pro to project your new savings needs.
This is crucial for divvying up retirement assets and for building on them. Then focus on saving what you can to close the gap between
what you have and what you'll need. Note: If you came away from a divorce with investments, you need to figure out whether they
still make sense for you as a single person. Municipal bonds may have made sense when you were in the 36 percent tax bracket, but in a
lower bracket, taxable investments are smarter. (If you're going to be shifting some assets, try to do the selling before the
divorce.)
YOUR CAREER
For many women, for social reasons as much as monetary ones, divorce brings a renewed focus
on career. This is a time to shop carefully for the right corporate environment, that is, one that provides good benefits,
especially if you're responsible for providing health insurance for yourself and your kids. And if, like many divorcees, you find
that you're playing catch-up in your retirement accounts, look for a company that offers a generous match to 401(k) contributions,
and, if you can find it, stock options.
Finally, remember that even as you're working toward your new goals, doubts about the future
are normal. Your divorce settlement may represent the largest sum of money you've ever had to handle on your own. And to further
complicate matters, it comes hand-in-hand with new, seemingly overwhelming responsibilities for your kids and your career. If you feel
like you want a helping hand with your finances, now's the time to get it. Ask friends who've been through the mill for their
recommendations.
Jean Chatzky is a financial contributor for the 'Today,' 'Later Today,' and 'Weekend Today' shows and editor-at-large
for Money magazine. Information provided courtesy of Jean Chatzky and Money magazine, copyright, 2000. All rights reserved.
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