First, Take Stock of What You Have Together
As you approach this next phase of life, you must know everything about the financial situation of you and your former spouse.
Start by understanding your debts — all of them:
- Is there any credit card debt?
- Do you have a mortgage together?
- Are there any cars in both of your names?
- Did you co-sign a loan together?
- Did you bring any debt into the marriage? (i.e., student loans, business debt, etc.)
If you own a home with your soon-to-be-ex, and one person wishes to stay in the property, they will likely have to pay off the difference to their partner. For example, if your house is worth $500,000 and you’ve jointly paid off $100,000 of your mortgage, you may have to pay your partner an additional $200,000. These exact numbers will be specified within the divorce settlement.
While the comfort of home is important, it’s vital to consider if remaining there would set you back financially, especially with regards to retirement planning.
Next, move on to assets.
Be thorough when taking stock of all your assets. Doing so can help divide them as efficiently as possible and avoid a long, drawn-out mediation.
Your assets may include everything from 401(k)s, IRAs, investment accounts, company stock, savings/checking accounts, insurance policies, houses, and valuable art/collectibles.
But you may have opened some of these accounts while single, so how will you know what your state considers “marital” or “community” property?
What are Marital Assets?
Marital property generally refers to all assets both spouses acquire while married. Anything acquired separately before marriage (or after separation) is known as separate or “nonmarital” property. So, if your IRA gained funds during your marriage, you may have to distribute some of the profits to your former spouse.
Remember that when laying out your assets, it’s important to distinguish between marital and nonmarital property. Doing so protects yourself from outstanding debts your spouse brought into the marriage and/or safeguards substantial assets you brought into the marriage, such as property or inheritance.
No matter your situation, working with your financial advisor to create an inventory of how your finances are intertwined can help you protect your retirement funds.
Start Establishing Things on Your Own
Once you’ve identified all joint and individual assets, begin thinking about your next financial steps.
It can be frightening to start over, especially if you’ve been financially dependent on your spouse. And yet, the sooner you evaluate the changes you need to make, the more time you have to create a plan and feel confident about the future.
So, where should you start?
Focus on Building Good Credit
A great jumping-off point is evaluating your personal credit.
Focus on your credit score leading up to (and during) retirement. Remember, any joint accounts can still impact your credit score.
It’s best to open individual accounts for all future expenses and investments. When bank accounts and investments are in your name, your income can go directly to paying your bills and saving for retirement.
It’s also a good idea to stop automatic payments/transfers to joint accounts and try not to touch those joint accounts during the divorce proceedings.
Determine if You’ll Need to Change Your Work Situation
Are you working full-time or part-time? Will that need to change?
It can be tough to transition from a lifestyle you’ve grown accustomed to but considering inflation, high real estate costs, and a general increase to the cost of living, there’s a good chance you will need to increase your income.
This is especially true because the divorce process can often “set you back” financially. This means you may need to budget extra monthly funds to catch up on retirement savings, whether through an employer-based or personal investment account.
Consulting a financial planner can be extremely valuable during this time. They can help you set new retirement goals, update your retirement strategies, and create a plan that keeps you on track.