You want to know what destroys the most divorce settlements?
Money problems. Errors that follow you for the rest of your life after the divorce is final. And here’s the even scarier part – you don’t even know you’re making them at the time.
Oh no, we’re not talking about small mistakes here…
These are the massive, life-changing money mistakes that cost you hundreds of thousands of dollars in your divorce. And the truth is, 61% of couples who argue about finances at least once a week end up divorced. But once divorce is on the table, the same financial problems can wreak havoc on your future if you’re not prepared.
And that’s why working with a divorce financial advisor is absolutely crucial. Your advisor is the difference between leaving financially secure and spending the next 10 years digging out of the hole you got yourself into.
What you’ll learn:
- Hidden Asset Traps Most People Miss
- Why Your Retirement Is At Risk
- Tax Bombs Waiting To Explode
- The Real Cost Of Keeping The House
Hidden Asset Traps Most People Miss
Here’s a crazy fact you’re about to learn…
Divorcing couples almost never have a good idea of what they own. They think they do but, again, they’re wrong and it ends up costing them.
You see, divorce financial planning is much more than splitting up the house, cars, and bank accounts. It’s making sure you and your spouse find and understand every single asset.
Let’s review…
Assets people forget:
- Unvested stock options
- Pension benefits
- Business interests
- Club memberships, etc.
And get this…
Even if you find all the assets, valuing them is a whole other ball game. That retirement account that looks like $500,000? After taxes and early withdrawal penalties, you may be left with only $300,000.
That sounds scary already.
Now imagine if your spouse has hidden debts. A secret credit card. A business loan they never mentioned. In many states, you can be on the hook for half of their debt without even knowing.
Why Your Retirement Is At Risk
Okay, one more thing most lawyers won’t tell you…
Divorce is, without a doubt, the single worst thing you can do to your retirement.
Don’t panic. I’m not trying to be dramatic. I have the numbers to prove it.
Women’s household income after divorce drops by a whopping 41% on average, nearly twice the drop men experience.
See the 41% in bold above? That’s not a typo. Your retirement just got 41% more expensive.
Think about what that does to your golden years.
You had a retirement plan. You were on track. Then divorce happens and, bam, you’re 45, 50, 60 years old starting over.
Here are a few ways retirement plans get destroyed:
- Splitting retirement accounts incorrectly
- Transferring accounts using the wrong type of order
- Failing to understand the tax consequences
- Ignoring survivor benefits
The worst part? Most people don’t realize their mistake until they try to retire and find they can’t afford it.
Tax Bombs Waiting To Explode
Okay, this is where it gets a little dangerous…
Divorce settlements are a playground for tax traps and the IRS doesn’t care if you didn’t know.
You see, one of the most critical mistakes people make is thinking all assets are created equal. Hint: they are not.
$100,000 sitting in a savings account is worth $100,000. $100,000 in a traditional IRA is only worth $75,000 after tax. $100,000 in highly appreciated stock can trigger capital gains taxes in the hundreds of thousands.
See the issue here?
Most people divide assets using the face value, the “cost” to the marriage. They think they’re getting a fair deal and go about their lives. Then tax season rolls around, the IRS comes knocking, and… BOOM! They’re stuck with thousands in taxes they didn’t plan for.
And speaking of tax season…
Do you know alimony is no longer tax deductible for divorces after 2018? Child support never was deductible. Mess those up in your settlement and you’ve just set yourself up for significant tax consequences down the road.
By the way, these “oops” are 100% avoidable with proper divorce financial planning. Which just goes to show how very, very frustrating divorce is.
The Real Cost Of Keeping The House
Believe it or not, the number one thing everyone wants is to keep the house.
Oh, I know, you’re sitting there thinking “Yeah, right, I can’t wait until I can sell the stupid place”. Stop it. I’m serious.
The house. No one, and I mean NO ONE, wants to give it up. And here’s the problem with that…
Keeping the house may be the absolute worst financial decision you make during your divorce.
Let me show you why:
First, houses are expensive to maintain. The mortgage payment is the tip of the iceberg. Property taxes, insurance, maintenance, repairs, HOA fees, etc. etc. etc. Really think you can afford all that on a single income?
Second, the house is not a liquid asset. You can’t eat equity. If you trade off other liquid assets for the house, you might find yourself house rich and cash poor.
Third, if you’re like most people, you’re not thinking clearly about the financial sensibility of keeping the house because of the emotional attachment you have to it.
One more brutal truth before we get off this topic…
A lot of people who fight tooth and nail to keep the house end up selling it in two years anyway. After real estate commissions and moving costs, they’re out tens of thousands of dollars.
The smart thing to do? Run all the numbers. All of them. Be brutally honest about what you can actually afford.
Hidden Costs Nobody Talks About
Here’s one last little fact your lawyer won’t tell you…
The hidden costs of divorce are not just legal fees. Sneaky, overlooked expenses that can make your financial recovery take years longer than it should.
Health insurance, for example, is a big one. If you were on your spouse’s plan, you’re going to have to get your own. That could be $200, $300, $400 a month or more.
Life insurance policies need updating. Beneficiaries changed. New policies may be required for alimony and child support payments.
Credit is another. Your credit score might tank during your divorce. Expect to pay higher interest rates on car loans, credit cards, and just about anything.
Taxes? Oh yeah, they change too. Filing status change can bump you into a higher tax bracket. Without planning, you can expect to owe the IRS thousands more every year.
Incredibly expensive but rarely thought about stuff includes:
- Setting up a new household
- Children’s therapy
- Career coaching or retraining
All of these costs are 100% invisible to your settlement agreement. But they are 100% real. And they are 100% expensive.
Making Smart Settlement Decisions
Okay, I’ve thrown a lot at you. Let me sum it all up:
Don’t do stupid things with money during your divorce.
Organize. Document. Think long term. Understand the tax consequences of every decision.
Oh, and one more thing most people don’t do? Get professional help.
The right divorce financial planning team can save you tens of thousands of dollars in avoidable mistakes. They can spot things you’d never see.
Your lawyer’s job is to get you divorced. That’s it. Your job is to live with the financial consequences for the rest of your life.
Wrapping It All Together
Divorce financial planning is not an option. It is survival.
The mistakes we talked about in this article don’t just hurt for a few months or even a few years. They can wreck your entire financial future.
The good news? Every single one of the mistakes above is completely preventable.
With the right knowledge and professional assistance, you can navigate a divorce without completely destroying your finances.
Take the time to understand everything you sign. Question everything. Run the numbers several times. There’s no such thing as too much due diligence.
You will thank yourself later for being so diligent now. Because the only way to fix these mistakes after divorce is final? It’s almost impossible.
Don’t be one of those cautionary tales. Make divorce financial planning a priority.