First Financial Steps for the Newly Single

Position yourself to thrive in your next chapter by following these best practices.

Divorce is not pleasant, and as you navigate the dissolution of your marriage, it is easy to get caught up in the emotional aspect of the journey. But it is important to remain diligent. After all, the steps you take during this time period can have a significant impact on your overall financial wellbeing.

Below, we discuss best practices for your next chapter.

Finalize all Financial Arrangements

You’ve just signed your divorce decree – followed by a sigh of relief and, potentially, even a commemoration with friends. But the work is not over. A decree is simply a contract between you and your ex-spouse that states how marital property should be divided. It is now up to you to ensure that the terms of the divorce settlement are implemented. This includes, but is not limited to:

  • Changing the way financial accounts are titled

  • Transferring divided assets into new accounts

  • Executing any necessary quitclaim deed on properties

  • Transferring title on personal property like cars, boats and RVs

And don’t forget your debt. Make sure to create a list of liabilities that need to have your name or your ex-spouse’s name removed from them, per your divorce decree. If you own property together and both names are on the mortgage, a quitclaim deed will not remove you from this obligation. If your spouse was awarded the house and fails to make a payment, you are on the hook – and your credit can be severely affected. To ensure you are off the loan, it is best to sell the property or have it stipulated in the decree that the existing mortgage be refinanced by your ex-spouse within a specific period of time. 

Update Your Estate Plan and Beneficiaries 

Failing to update your will, trusts and beneficiary designations during or following a divorce could result in your ex-spouse inheriting your assets. Work with a trust and estates attorney to ensure that your ex-spouse is removed as beneficiary and/or executor on all relevant materials. Doing so is complex and dependent on state law. In most states, for example, you will not be able to change your life insurance, retirement account and pension beneficiary designations until the divorce is finalized. But you can – and generally should – update power of attorney and medical directives at the onset of the divorce process. 

Your adult children should also make the appropriate updates. While these can be tough conversations to have, it’s wise for everyone to have clarity around the parent they have named as their agent.

Plan for a New Lifestyle

Many financial decisions made immediately following a divorce come with high opportunity costs. For example, it is common for the newly single to want to maintain their previous standard of living, including keeping the marital home or taking elaborate vacations. 

If they have not thoroughly modeled their new financial reality, however, every dollar irreversibly spent to maintain that lifestyle represents the loss of a potentially lucrative investment that could be integral to their financial wellbeing. With investible assets on average doubling every 10 years, $100,000 or $500,000 invested today is a potentially lifestyle-altering asset two or three decades from now. It is pivotal that you plan wisely: Putting off this critical step can have dire consequences on your future.

The power of tax-deferred compounding

Make Strategic Liquidity Decisions

Divorce often brings short-term financial challenges, and in many cases you will need to think more strategically about decisions. For instance, you may need to purchase a new car, and you may have the liquidity to do so in cash. But taking a low-interest auto loan could make far more sense. By doing so, you could keep cash reserves on hand, or invest at a rate exceeding the interest on your loan.

Conversely, those in need of liquidity after divorce often instinctively turn to their investable assets, including retirement accounts. But this can be a disastrous misstep – taxes and withdrawal penalties on a 401(k) can reach nearly 50%. Decades of sound investing and the potential for the plan's greatest earning years can be wiped out. Instead, explore taking out a line of credit or other lending solution. 

Build Your Team

A divorce can seem like starting over in life from a personal finance perspective – except instead of starting with a blank slate, you are starting with a highly complex array of assets, liabilities and legal obligations. In many instances, a team of holistic wealth advisors is a must, both to optimize your divorce settlement and prepare you to achieve new goals. This team can also work on your behalf to coordinate seamlessly with other experts, including your family law attorney, CPA and trusts and estates attorney.

Experiencing a divorce and navigating new financial complexities is not easy. But with diligent planning and execution, you can emerge with a solid financial foundation to build the next chapter of your life.

UNEXPECTEDLY SINGLE

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The Northern Trust Institute

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Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

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