Divorce usually has significant impact on a person's finances .When you are happily married, it is easy to think that your relationship will last forever and that there is no need to plan for the financial fall-out from a divorce. However, according to the Economic Mobility Project (EMP) study by the Pew Charitable Trust, nearly 50% of both men and women fare worse economically after a divorce than they did when they were married.
A recent article featured in Smart Money contains advice by financial planners and attorneys on what to do during a marriage in order to avoid future headaches should the marriage end. Here are the top five suggestions for actions couples should take together, and individually, in order to protect themselves financially:
1. Don't neglect your retirement fund.
Many couples tend to overlook saving for retirement until they are older. Where one spouse is the sole or major breadwinner, the other spouse may take a backseat when planning for retirement. Often a non-working spouse will rely on the breadwinner to invest and plan for their joint retirement. However, if there is a divorce, the person who has not planned ahead may find himself or herself having to start their personal retirement fund from scratch at a later age.
Attorneys and financial planners suggest that each partner contribute as much as they can to their company's retirement plan, if employed. If unemployed, financial planners suggest that the nonworking spouse contribute to their partner's spousal IRA. Many wealth managers also recommend that couples and individuals make saving for retirement a major financial priority; Lisa Caputo, president and CEO of Women & Co., a division of Citigroup, even suggests spending a little less on a child's college fund if necessary.
2. Do not ignore your career
Another common mistake many people make after marriage is allowing professional skills to lapse. In addition to many women leaving the workforce to be stay-at-home mothers, according to the U.S. Census Bureau, there are an estimated 105,000 stay-at-home fathers. Both men and women who leave the workforce often make the mistake of completely leaving their careers behind and losing valuable expertise. When forced to go back to work, they find that they lack the skills to be competitive in the job market.
Many financial planners recommend keeping skills fresh by taking consulting jobs, volunteering for a charity, attending networking events, keeping current in the industry by signing up for newsletters and magazines, maintaining membership in business or industry organizations, participating in continuing education and keeping licenses or certifications up to date.
3. Become involved in household finance
In many couples, one person is often in charge of all of the household finances, which can be a real problem upon divorce. New Mexico is a community property state, where all marital assets and debt are split equally upon divorce. If only one partner handles all of the finances, he or she may be acquiring large amounts of debt that the other party may not know about. Additionally, as mentioned above, one partner may be relying on the other to save for their joint retirement only to find that their spouse neglected to save enough.
Steven Kaye, a certified financial planner (CFP) based in New Jersey, suggests that both partners attend meetings with attorneys, financial professionals, insurance agents, and accountants. Both spouses should get involved and be aware of the particulars of insurance policies, bank accounts, investments and debts. Moreover, Kaye recommends that all documents pertaining to the above be kept with other important documents like deeds and wills.
4. Maintain your personal credit
One of the biggest financial mistakes some individuals make when they get married is that they do not maintain a personal bank account or credit card. Many couples have only a joint bank account and a credit card in one spouse's name where the other spouse is only an authorized user. The, upon divorce, one spouse has no credit history and will have a difficult time finding a credit card at competitive interest rates and a larger line of credit. This can be especially difficult in divorce where that spouse is looking to rent or buy a home.
It is important to know that being an authorized user of s spouse's credit card does not build personal credit. Caputo advises married couples to maintain a joint bank account as well as two separate individual accounts, one for each spouse. She also recommends that spouses keep separate credit cards.
5. Obtain professional financial advice before divorce
Many people going through a divorce make the mistake of focusing on one issue; for example, getting custody of the children or retaining ownership of the family house. However, in doing this many individuals lose sight of the bigger financial picture, and end up agreeing to disadvantageous terms like low child support payments, little or no alimony, or a larger share of the marital debt.
If divorce is inevitable, Ginita Wall, certified financial planner and co-founder of Women's Institute for Financial Education, recommends that partners establish their future financial needs and ensure that their divorce agreement will meet these needs. It is often advisable to consult a financial planner to discuss these matters.
Even though divorce may not happen, it is always important to be prepared financially. Taking a few preventive measures today can mean the difference between future financial security and bankruptcy. If divorce is unavoidable, it would be prudent to discuss these issues early with an experienced divorce attorney.