As a divorce financial advisor, I’m often brought in to work with a client who is going through a divorce, but I’m just as often brought in AFTER a divorce. The newly divorced client is typically concerned about their finances and wants to make sure they have enough now and that they will have enough during retirement. Even very wealthy clients – those with millions of dollars after a divorce – have the same nagging questions and fears that keep them up at night. I’ve developed this checklist and work with my clients to make sure each and every one of these is addressed.
With many divorces lasting a year or longer, once the marital settlement agreement is reached you may want relief from paperwork, lawyers, or even thinking about your finances. Although that is a normal reaction, there are few things you should consider to make sure you are protected and that you are on the right track financially. Go through this list of 21 divorce financial tips to ensure nothing slips through the cracks, and once you have completed it, you’ll have financial peace of mind and be able to sleep like a baby.
- Cancel joint accounts. If you haven’t already, cancel and close all joint accounts with your ex-spouse. Joint accounts that remain open are liabilities that could come back to haunt you. The last thing you need is to be on the hook after your ex-spouse runs up charges on credit cards or overdrafts a bank account. Close these accounts immediately. If you currently have a balance on the account that cannot be paid off (for example a credit card), instruct the card that you want to suspend the account and not allow any future charges. Confirm that the account cannot be re-opened or unsuspended.
- Open new accounts. Depending on the situation, it may make sense to apply for new credit cards before you cancel joint accounts. If you have marginal credit and do not have an emergency reserve of cash, getting access to a credit card should be your priority. I’m not one who advocates using credit cards, but I’ve seen what can happen in the short-term if someone does not have sufficient assets to cover their rent, buy food, or pay for healthcare. Sometimes you need a small bridge loan after a divorce while you get on your feet. A credit card can be a temporary bridge. And it’s not just new credit cards you need to open. You will also need to open new bank accounts, investment accounts, etc. Make a list of the accounts you had while married and seek to replace these as soon as possible.
- Change beneficiaries. I cannot overestimate the importance of changing the beneficiaries on your accounts. If you fail to do this, your ex-spouse could end up with your IRA, 401(k), and other assets when you pass away. Changing beneficiary designations is an easy process that can usually be done with a simple form. Most forms will list a primary beneficiary and a contingent beneficiary. If you have a new living trust, ask your estate attorney who should be listed as primary and contingent beneficiaries on your accounts.
- Update your personal insurance coverage. Contact your insurance broker and update your automobile, homeowner’s, and umbrella liability coverage. Pay particular attention to the list of assets you scheduled on your homeowner’s policy. Often there will be jewelry, firearms, collectibles, and artwork that was listed but that may no longer apply if your spouse received these items in the divorce. There is no sense in paying insurance premiums for assets you do not own. For asset protection purposes, make sure you have an umbrella liability policy on yourself. This is cheap asset protection and a must have.
- Create an emergency reserve. Now that you are single, it is more important than ever to have a cash safety net. Have six months of living expenses in cash and set it aside in a bank account – or because interest rates are so low – consider putting the money in an ultra-short-term bond fund to get a 2% to 3% yield on your money.
- Create an income safety net. One of the most common fears I hear from men and women alike after a divorce is that they feel financially vulnerable – that they don’t have anyone to turn to if they get laid off or suffer a financial setback. One solution is to consider getting a disability insurance policy on yourself. Disability insurance provides you with a monthly “paycheck” if you become injured or ill and cannot work. It is often not cheap, but it can provide peace of mind that your financial life will not be ruined if you suffer from a long-term disability.
- Check your credit score. During and after a divorce you should check your credit score at all three credit bureaus. You can receive a free credit report (note that you will receive a report, not your credit score), but if you can afford to get your score I would recommend this as well. If you see errors or other issues on the credit report contact the bureau immediately and get these discrepancies resolved as they can impact your credit and cause you to pay more for loans, insurance, and can even make it difficult for you to get a new job or rent an apartment.
- Create a new estate plan. There is no better time to think about your estate plan than after a big life event. If you have children, you may need to update your will, but even if you don’t have children there are many estate planning issues that still apply to you. Update or create a power of attorney for healthcare and finances, living will, and other documents. If you had a living trust, work with your estate attorney to create a new trust.
- Retitle assets in your name. Post-divorce, there may be many assets that need to be retitled. For example, if you owned your house in a trust with your spouse you will want to retitle the house in your name personally or in the name of a new living trust you create.
- Run new tax projections. Immediately after a divorce, work with your CPA and do a new tax projection based on your income and deductions. Based on your new tax liability you may need to change your withholding, pay more or less estimated taxes, and change your investments. For example, if you were in a high tax bracket with your spouse and owned tax-free municipals, after your divorce your taxes may be low enough that you’d do better financially by selling the municipals and investing in taxable bonds. Run the analysis to make sure.
- Analyze your investments. If your spouse did the investing you may now own things that you aren’t familiar with or that are not right for you. Do a deep analysis of each investment to see if it is prudent and makes sense for your risk tolerance and goals. Work with an independent investment advisor to help you create a new asset allocation that is appropriate for you and to analyze the tax consequences to sell and to look for replacement investments.
- Create a new financial plan. Work with an independent financial planner to help you analyze your financial situation post-divorce so you know what you should be saving for retirement, what your budget should look like, and how to make the most financially of your new life.
- Create a new budget. If you cannot afford a full-fledged financial plan, create your own budget. List your income sources (e.g., work, marital support, child support, investments) and list your new expenses. Track what is coming and going so you can see how much you have to save and invest and how much you have to spend on non-essentials.
- Setup a new filing system. Since you will have all new accounts, policies, and documents, there is no better time to create a new filing system. The time you spend designing the system, in the beginning, will pay off by helping you locate things quicker and by giving you the data and documents you need to make the best financial decisions.
- Consider using an online budgeting and tracking system. If you want to be able to see where you stand financially at any time, considering using a website such as Mint.com or the others to track your expenses, income, assets, and liabilities in real time. The financial insecurity many newly divorced people feel can be lessened or eliminated by having access to their financial world at a moment’s notice.
- Hire a new financial team. If you are the “out spouse,” the spouse who didn’t have the relationship with the CPA, financial advisor, attorney, insurance broker, etc., then you will need to create your own team. Start slowly. There is no rush. Ask your family law attorney for referrals. Use AdvisorFit to help you evaluate the financial advisors you find.
- Update the Social Security Administration. If you change your name after a divorce, contact the Social Security Administration to update them with your new information.
- Check your safe deposit box and rent a new one. You’d be surprised how often couples going through a divorce forget about the contents in their safe deposit box at their bank. Check what you have in your safe deposit box and then close the account. Consider getting a new safe deposit box at your bank if you have valuables that need to be secured.
- Buy a home safe. A home safe is an important part of any financial plan. If you didn’t get the safe in the division of assets, get one to protect your valuables.
- Buy a new shredder. Identify theft is all too common and it can cost you thousands of dollars to resolve in addition to countless hours. Buy a good cross-cut shredder so you can destroy old credit cards, credit card offers, and other items you don’t want to fall into the wrong hands.
- Strip your computer of valuable information. If you shared a computer with your ex-spouse but are not taking it with you, use a program such as Eraser or Permanent Eraser (for Mac) to destroy personal files and be sure to delete personal information from Internet browsers.
Whew! It’s a long list of divorce financial tips, but just tackle one at a time until you’ve addressed each of them. By completing the Post-Divorce Financial Checklist, you will be on the right track financially and can rest assured you have done everything you can to take control and make the most of your finances.
About the Author
Robert Pagliarini has an amazing job. He gets to work with people from all over the world who come into money overnight. Robert is the president of Pacifica Wealth Advisors — a wealth management firm that has developed a national reputation for working with sudden wealth recipients. Robert is a CFP®, IRS Enrolled Agent, and Certified Divorce Financial Analyst™ who uses his dual masters in financial services and the other in psychology to address the financial and often psychological issues around sudden wealth.
Robert is a #1 bestselling author and syndicated financial columnist for CBS and Forbes. Robert is often called upon by the media for his financial advice and has appeared on Dr. Phil, 20/20, Good Morning America, ABC News, and many others.
You can connect with Robert on Twitter @rpagliarini or by email at email@example.com.