Blog | 5 P’s of Life
It’s hard enough to deal with the emotional turmoil of divorce but understanding some of the jargon can make one’s head spin. Your definition of “fair” or “what is rightfully yours” may not be what the divorce settlement will reflect.
Unfortunately, items accumulated in a marriage (aka, marital assets) may or may not be split 50/50 in a divorce. It depends on the state where your divorce is filed.
Many states use “equitable distribution.” This terminology means a “fair and equitable” split of marital assets which may or may not mean 50/50. It’s up to you to present the rationale to support the amount you believe is fair and equitable.
The best way to begin this process is by calculating how much you spend now in your marital life. It’s used as a baseline to show your current lifestyle.
If you and your spouse both work, two incomes can afford a comfortable lifestyle. In addition to the basics (such as home expenses, food, etc.), there’s also spending on entertainment, travel, and other luxury items.
Next, estimate how much you expect to spend in your lifestyle after your divorce. Use your marital spending as a starting point and make adjustments.
It is unrealistic to expect the divorce settlement to grant you the same lifestyle you experienced when married. Stronger arguments for establishing what is fair and equitable relies on being realistic about your post-divorce lifestyle.
Once you have a good understanding of these expenses, then assess your income. If your income is significantly less than what you expect to spend in your post-divorce lifestyle, then you’ll need to cut expenses or increase your income with a higher paying job or side-hustle.
If you are currently not working, don’t expect alimony (aka, spousal maintenance) to be paid indefinitely. It rarely happens.
You’ll need some plan to return to work. An option is to receive alimony to cover expenses while you return to school if you need an additional degree or certification for employment.
Also, with the tax treatment change for alimony in the Tax Cuts and Jobs Act (TCJA), your state may have developed a formula to calculate the amount and duration for alimony (e.g., Colorado).
Additionally, assess how much you need for retirement and the amount of your shortfall. If you are going through a divorce later in life (aka, grey divorce), this assessment is very important but often overlooked.
There may be retirement assets in employer-sponsored plans, but don’t assume they are available to be split for a divorce. It will depend on the plan documents.
You’ll need another judicial order called a qualified domestic relations order (“QDRO”) if you expect assets from an employer-sponsored plan. Yes, this means possibly hiring another attorney that specializes in these orders. If your divorce settlement includes retirement assets from an employer-sponsored plan, get a QDRO before signing the settlement.
While you may think you can catch up with your retirement savings, time is not on your side to take advantage of growth in any type of investment (whether that’s in the stock market or in real estate).
You may think you can work longer, but in reality, it will depend on your health. Planning for retirement is important to consider with grey divorces.
Going through the divorce process can be complex. Not only are you learning divorce terminology, but you are also making critical financial decisions about what is fair and equitable
If you’re considering a divorce, seek help from a CFP® professional with experience working with clients going through a divorce. They will analyze your financial situation and provide information for you to use when you work with your attorney.
Even if you’re already in the divorce process, seek this financial help before signing your divorce settlement. It’ll help you better understand how the proposed settlement will impact you now and in the future before it is final.
ABOUT THE AUTHOR:
Niv Persaud, CFP®, CDFA™, RICP®, CRPC®, is the Founder of Transition Planning & Guidance, LLC. Life is more than money. It’s about living the lifestyle you want and can afford. For that reason, Niv consults with clients on money, life, and work. Her approach capitalizes on techniques she learned throughout her career, including as a management consultant, executive recruiter, and financial advisor. Her services include developing spending plans, comprehensive financial plans, divorce financial reviews, retirement plans. Niv actively gives back to her community through her volunteer efforts. She believes in living life to the fullest by cherishing friendships, enjoying the beauty of nature and laughing often — even at herself. Her favorite quote is by Erma Bombeck, “When I stand before God at the end of my life, I would hope that I would not have a single bit of talent left and could say ‘I used everything you gave me.’”
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