We see divorce as the biggest negative impact on finances for a couple. For women, the impact is bigger and mistakes are all too similar. Here are five common mistakes women are making in divorce.
1) Settling for the home.
Most women want to settle for the house, however, that may not always be the best deal. House payments and maintenance often become difficult and too burdensome financially. Keeping the house and giving up claim to retirement accounts often hinders her retirement. In some cases, the settlement may require a refinance of the house to pay equity to a spouse. It can lead to cash-flow problems. Trading retirement savings for equity in a home that could be too expensive to keep can end in a disastrous financial situation.
2) Improper valuation of assets.
Are a $600,000 bank account and $600,000 home equity equal in value? They may appear equal on a settlement sheet, but they are not. The home will require annual real estate taxes, upkeep and maintenance, utilities, etc. If you sell your home you may be hit with a capital gains tax and real estate commission. If you bought the home for $200,000 and it’s now worth $600,000, your capital gain is $400,000. After your $250,000 exclusion you’ll have to pay capital gains tax on $150,000. So, no, a bank account and home equity are not really equal.
3) Misinformed about household finances.
In a divorce settlement, some assets with value never make it to the settlement sheet. People tend to forget assets such as pensions, stock options, deferred compensation, tax refunds, time shares, country club memberships, etc. All of these items have value and should be considered during a divorce.
4) Life insurance is vital.
You should secure alimony, property settlement and child support payments with life insurance. If you are depending on alimony or child support to maintain your lifestyle, insure it. Alimony payments will end upon the death of your ex-spouse. Always negotiate, prior to the final settlement, for life insurance coverage. In most divorce cases, life insurance is fairly standard. But, under-insurance of an ex-spouse is all too common.
5) Understand your divorce agreement.
Know how your divorce settlement options will impact your future financial security. Once your final divorce decree is signed, it is difficult to make changes. Don’t let your emotions or your desires to finalize the divorce stop you from thoroughly analyzing the short- and long-term financial implications. What may seem sensible today may prove to be disastrous for you in 10 years. I’ve read divorce decrees for my clients and most often the terms of the agreement are misunderstood. Terms of alimony, triggers resulting from remarriage, claiming the kids on taxes or paying children’s college cost are often misunderstood. Understand your divorce agreement before you sign.
All too often divorcing people focus on short-term issues rather than considering the long-term financial effects. Money decisions, coupled with emotional stress, can lead to disasters.
Work with an experienced Certified Financial Planner who can analyze your situation. Seek advice before and/or during the divorce. After is often too late.