Financial Mistakes Not To Make In A Divorce
Dividing marital property is almost always a one shot-deal, no do-overs here. Making mistakes when it comes to your division of property can cost tens of thousands dollars and threaten financial security.
Here is a list of some of the biggest financial mistakes often made:
1. Making decisions without fully understanding the implications.
Educate yourself on all options available to you, taking advice from a friend who just went through a divorce could be costly.
2. Losing control of your divorce.
This is your divorce and you should be informed of all decisions your divorce professionals are making on your behalf. Know what your goals are and your best short and long-term outcomes. If divorce spirals out of control you pay the price.
3. Settling for less than you need or committing to more than you can afford.
Do not underestimate your expenses in order to live within your means. If you are paying, do not commit more than you can afford. Make a diligent plan for your projected overhead when you lead separate lives.
4. Trading off part of the financial settlement.
Trading part of your financial settlement in exchange for child custody or more visitation time will ultimately lead to disaster. These are separate issues and should not be pitted one against the other.
5. Deciding financial issues one at a time.
Financial issues are like pieces of a puzzle that affect each other, falling into place when you understand the comprehensive picture. Factors such as income tax, capital gains taxes, investment risk, inflation and transferability of assets all interact with each other. A fair settlement begins by looking at a comprehensive picture of your finances and then determining suitable courses of action.
6. Failing to adequately insure financial provisions of the settlement.
If you are receiving spousal or child support, what happens should your former spouse become disabled or dies? Will you lose your support? You must protect your right to your financial support with life insurance on the payor.
7. Failing to address unsecured debts.
Creditors will not care if your former spouse fails to pay off your debt as ordered in your settlement agreement. In the eyes of the creditor it is still your debt.
8. Failing to understand the custodial parent should not always keep the house.
Keeping the family home is often an emotional decision and not a financial decision. If you cannot afford to keep the home this fact is bound to surface and will likely leave you in a worse financial situation than if you had realized you cannot afford it in the beginning. Often one spouse will trade off financial retirement assets for the home, finding themselves unable to retire as planned. They have become house rich, income poor.
9. Believing that a 50/50 division of property is a fair division.
Some assets have tax implications others do not. Pension and RRSPs need to be discounted by an average tax rate that would be realized in retirement. Some investments will have a capital gain on sale, others will not. During your settlement process you need to compare apples-to-apples. In addition, future earning potential for each spouse can be a big factor in equitably splitting your assets.
10. Using unrealistic assumptions about inflation and investment returns.
Projecting investments using an investment return that is too high will lead you to believe that you have more financial security than you actually have. Using an inflation rate that is too low will grossly underestimate needs. You could find yourself in a situation where you quality of life is dropping year by year.
11. Not correctly evaluating the defined benefit pension plan.
A defined benefit plan pays a monthly income at retirement and has a value today. What is that value? Often it is important to hire an independent and objective actuary to value that pension. This value can often be quite different than what is reflected on the pension statement.
12. Failing to consider alternative solutions.
Have you considered various options to splitting marital assets? Each option has different future outcomes you may or may not be comfortable with.
13. Failing to ask, “Will I be financially secure after my divorce?” before signing the divorce papers.
Only looking at the immediacy of splitting assets and obtaining spousal and/or child support, without understanding how it looks 5, 10 or 20 years down the road, you are doing yourself a great disservice. Planning for the future is the key. By addressing all the financial mistakes discussed here, and analyzing the long-term financial impact of various settlements, you achieve excellent understanding of the shortfalls of certain proposed settlements and the fairness of others. Focus not only on your immediate and short-term needs, but your long-term financial security. Remember, once the papers are signed, the settlement is a done deal!
14. Failing to plan before the divorce is finalized.
A written comprehensive financial plan addressing cash flow, debt, education funding, insurance needs, employee benefits, retirement planning, investments and estate planning, empowers you with the knowledge you are in control. Plan to handle post-divorce financial issues like transferring pension benefits, securing health insurance and changing ownership of accounts. Empowered Divorce Solutions can help you understand how to address key financial issues important to achieve financial success.