At a glance
- Take stock of your financial situation—then figure out your short- and long-term goals.
- Update your personal documents and account information.
- Make a plan to accumulate emergency savings and prepare for retirement.
A journey of a thousand miles starts with a single step. Start your journey as a newly single investor on the right foot.
Know where you stand
What do you know about your income and expenses? And just as important, can you answer this question yourself or do you need help?
“It’s important to have realistic expectations for yourself. If you haven’t written a check or looked at the balance of your retirement account in 10 years, it may be a good idea to ask for help. Taking a crash course in personal finance while you’re still adjusting to a major life event is a stressor you can avoid by teaming up with a professional,” said Kevin Miller of Vanguard Personal Advisor Services®.
Keep your eye on your credit
Keep a good thing going
Removing one spouse’s name from a long-term joint account—as opposed to closing the account—can strengthen the credit history of the spouse whose name remains on the account.
A credit freeze prevents credit reporting agencies from releasing your credit report without your consent, which can protect you from a spouse who may try to open an account in your name. Learn more at annualcreditreport.com.
Here are three questions you should ask yourself once your divorce is final:
What’s coming in?
Before figuring out how much you should be spending, you have to know how much you’re making. Your sources of income may include job earnings, Social Security benefits, alimony, child support, unemployment compensation, rental income, pensions and annuities, and investment income, including traditional IRA distributions.
What’s going out?
Divorce can be expensive. In addition to onetime expenses and losses, including attorney fees and split assets, you may have new recurring expenses—such as alimony, child support, and health insurance.
“Unfortunately, enrollment periods for health insurance aren’t flexible. For example, if you lose your current health care coverage as a result of divorce, you may only have 60 days from the date of the life event to apply for COBRA, private insurance, or coverage through your employer,” said Miller.
The cost of health insurance can significantly increase your monthly expenses. For example, a 50-year-old in Pennsylvania could expect to pay around $413 each month in health insurance premiums alone, not including any deductibles, according to a recent study by ValuePenguin.
“When you’re thinking about your monthly expenses, it’s also important to remember that previously shared costs—such as mortgage or rent, utilities, and groceries—may now be your responsibility alone,” Miller added.
Do I need to change my spending habits?
You don’t need to come up with a detailed financial plan right away, but take a close enough look at your finances to ensure that you can keep up with your monthly expenses while you figure out a longer-term plan.
“Income that you used to rely on can stop—and expenses that you’ve never had before can start—as soon as your divorce is final, so it may be necessary to adjust your spending habits right away,” said Miller.
Keep documentation current
Advances in technology may have removed the “paper” from paperwork, but it’s still work. Here are some documents to review and potentially revise:
Update your emergency contact information, will, agent authorization agreements, medical directives and health information-sharing agreements, power of attorney documents, and insurance policies (health, home, and auto).
“Newly single investors should also be prepared for their tax-filing status to change,” said Miller. “The IRS looks at your marital status on the final day of the previous tax year. If you were legally divorced by December 31, 2016, for example, you couldn’t file as ‘married’ for the 2016 tax year.”
If you and your former spouse have children, you’ll have to determine who will claim them as dependents. This is usually it’s based on the children’s primary residence. “Although this designation doesn’t come into play until you file your taxes, it can be a point of contention for couples. To avoid last-minute stress, work it out with your ex well in advance of the tax-filing deadline,” suggested Miller.
If you don’t have a spouse, you can designate anyone as a beneficiary for your employer-sponsored plan. If you’re still legally married (which you are even if you’re separated), federal law mandates that your spouse is the primary beneficiary of your account unless he or she signs a written waiver.
Other accounts that may have beneficiary designations include IRAs, 529 college savings plans, joint and individual accounts, custodial accounts for minors, savings accounts, and checking accounts.
Jointly owned assets
“If you and your former spouse have any jointly owned assets, including property, that wasn’t included in your divorce decree, you need to come to an agreement regarding how the assets will be managed going forward,” said Miller.
It’s also important to separate jointly held credit cards and accounts in which one spouse is an authorized user.
“In most cases, joint debt is just as much your problem as it is your spouse’s, but the way debt is divided at the time of divorce may depend on several factors, including the state in which you reside. Check with your lawyer or a financial advisor for more information,” Miller added.
A qualified domestic relations order (QDRO) is a decree for a retirement plan to pay child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent. If you receive QDRO benefits from a spouse or former spouse, you may be able to roll the money into your current 401(k) or a rollover IRA.
Rebuild your financial house
It’s time for you to call the shots. Rebuild your financial house as you see fit.
In case of an emergency
Aim to have an emergency fund with enough savings to cover your living expenses for 3–6 months. “I encourage clients to set a specific goal and divide it—that way, you can save a manageable amount each pay period. It’s usually a lot more successful than saving whatever you have left over,” Miller said.
Avoid making immediate changes to your investments, but don’t put them on the back burner forever. “Get comfortable with what you have (and why you have it) first,” said Miller. “This is especially important if you viewed your asset allocation holistically with your spouse. Your target asset allocation may change when it’s based on your preferences alone—your risk tolerance, your goals, and your time horizon.”
It’s also important to think long-term and evaluate how your future sources of retirement income, such as Social Security benefits, may be impacted by your divorce. Here are some points to consider:
- You’re eligible for spousal Social Security benefits if you’re divorced and your marriage lasted 10 years or longer.
- If your former spouse is eligible for benefits but isn’t receiving them yet, you have to be divorced for two years or more before you can file for a spousal benefit. (The two-year rule doesn’t apply if your former spouse is already receiving benefits.)
- A spousal benefit is half of the earner’s benefit. You can either claim a spousal benefit or your own benefit (based on your earnings record)—whichever is greater. The earner’s benefit is not affected in any way by a spousal benefit.
You’ve got this
If managing your money after a divorce feels like a daunting task, make a list of everything you need to do and prioritize each item on your list. Then give yourself a specific time frame to accomplish the first item. When you’re done, move on to the next.
And remember—if you’re going through a difficult time, keep going. You’ll find your way through it.
All investing is subject to risk, including the possible loss of the money you invest.
We recommend that you consult a tax or financial advisor about your individual situation.