Transitioning to Your Future
If you are considering a divorce, chances are you’re focused on the things that are coming to an end. However, divorce isn’t just about the end of a relationship; it’s the beginning of a new life and a new lifestyle. It is crucial when beginning this transition to re-evaluate your financial situation and plan for your future. To ensure you’re making the best possible decisions for your future financial stability, there are five important aspects to consider: your living expenses, alimony, downsizing, insurance, and retirement. Divorce is about more than dividing your assets, and these five aspects of financial planning will help you take the appropriate precautions before making big decisions.
The first step when making the decision to divorce is to calculate your living expenses. Your financial situation needs to be re-evaluated now that you and your spouse are budgeting to maintain two households rather than one. In order to properly calculate your expenses, you must review your income sources, debts, assets, and tax situations. Review your past year of bills and bank statements, get organized, and get prepared to make any necessary changes to your expenses and household budget.
If your spouse was the breadwinner of your family, it might be the time to start considering an alimony budget. Many people considering alimony have no idea how alimony is determined and whether it’s even a possibility for them, so here are the basics. Alimony may be an option for you and your spouse if one of you didn’t work for a significant part of your marriage. In cases of a long marriage ending, one party might be granted “permanent” alimony until they remarry or cohabitate with someone else. If the partner paying alimony retires, or is no longer working, this may change the amount of alimony owed to the other partner. It is essential that the partner paying alimony reports any changes in their income to the court as soon as they happen; otherwise, they will be subject to payments that don’t reflect their current salary.
Transitioning from one household to two is an emotional process that usually requires compromises from everyone involved. In order to maintain your financial stability, you may need to downsize your home. Moving can be a tricky family decision, especially if you fear uprooting your children from a home they feel attached to. Keeping the family home and preventing disruption in your children’s lives are understandable desires, but they’re not worth putting yourself in financial distress. Diversify your assets, especially if your home comprises a great majority of your wealth. You’ll likely want to aim for a mixed portfolio; it is always risky to put all your money in just one asset. Choosing a smaller, more affordable home may help prevent this risk.
Your health insurance may have been covered by your spouse’s work; if that’s the case, it’s a big new expense to consider once you get a divorce. The most efficient solution is to switch to the insurance your employer offers – or find a job with health care benefits if you don’t already have one. This alone can be a source of motivation to get back to work if you’re not currently employed. If you know that finding work that will cover your health insurance is not an option, you’ll need to make a plan to pay out of pocket. Paying out of pocket for health insurance can be a big expense, so research your options and make sure you’re getting the best deal for your family’s specific health care needs.
Retirement is something you must have in mind when dividing your assets and planning for your future. When the choice to either downsize your home or take from your retirement plan comes up, most people assume the house is the better asset to have. However, this is not true; your home is more likely to have ongoing expenses than a 401K plan. There are also tax implications to consider for retirement funds. According to Forbes, various types of retirement accounts – including 401K, 403B and Individual Retirement Accounts (IRAs) – are all subject to taxes once you withdraw from them. Roth IRA accounts, on the other hand, are not taxed. This makes a big difference in evaluating an asset’s revenue – consider whether your retirement account will require you to be taxed or not.
If you haven’t had much experience with financial planning, the decisions that come with divorce can seem overwhelming at first. The important thing to remember is that people who know what their living expenses will be, who know their rights, and who are willing to make some lifestyle changes and compromises, tend to come out of their divorces with a solid financial future. If you need assistance with your planning, it is always a good idea to seek help from a financial professional who understands long-term implications, tax rules, and can provide and objective point of view.