Finding Your Inner CFO After Divorce
Newly divorced moms face the crucial task of developing a fresh financial plan, but where should they begin? Most people walk away from divorce with a combination of investments, debt, maintenance, and child support. Perhaps you’ve questioned how they work together to create a stream of income to support yourself and your children. In my experience as a financial advisor, three areas are particularly important for newly divorced moms to address: investments, estate planning, and tax planning.
Before your eyes glaze over, let’s acknowledge that rebuilding a financial plan can be overwhelming. Even as an experienced CPA, it was a difficult process for me, and I found myself making decisions slowly. This is one reason, among many, why I am passionate about helping other women rebuild their financial plans after divorce.
After your divorce is finalized, there is still much to do. Savant’s Post-Divorce Checklist outlines the financial and legal steps to consider after your divorce is final.
Your New Role as Household CFO
As a newly minted chief financial officer, your first responsibility is to consolidate accounts and develop an investment strategy, otherwise known as, “Let’s get those assets working for you.” Perhaps you never managed the marital investments or didn’t agree with the way they were managed. While this may be a new experience, it’s a great opportunity to align your investment strategy with your goals and values.
First order of business: Round up all your accounts and review necessary title changes. For example, if you were awarded a former spouse’s IRA, this account will need to be retitled into your name before it can be transferred. The accounts may be at one firm or several. Consider consolidating your accounts and working with one financial advisor to help simplify life and streamline your investment management. Fee-only fiduciary financial advisors will assess your tolerance for the ups and downs in the market and then strive to build a well-diversified portfolio stocked with cost- and tax-efficient mutual funds. Broad diversification among many categories, e.g., large, small, domestic and international companies, growth and value, short-term and intermediate-term, is designed to help reduce your investment risk. The warning, “Don’t put all your eggs in one basket,” is sage advice in the investing world.
Once assets have been retitled, consolidated, and invested, consider your cash flow. This is usually every mom’s primary concern. After maintenance and child support, how much more do you need to support your living expenses? Will you need to earn more, take distributions from your portfolio, reduce expenses, and/or downsize? Your financial advisor can help you develop a realistic plan for cash flow and a backup plan if maintenance or child support should end prematurely.
Once you have your investment and cash-flow strategies in place, it’s time to focus on another aspect of your financial plan. Every newly divorced mom needs to create or update her estate plan. An estate plan consists of a will, power of attorney for healthcare, power of attorney for property, living will, and revocable trust.
Check Your Beneficiaries
Few people love meeting with an attorney to talk about death and taxes, but here are some great motivators: Visualize your former spouse making healthcare and financial decisions on your behalf if you become incapacitated. If you were to pass away, think about your former spouse acting as successor trustee and benefitting himself with assets that were intended for your children. Imagine your former spouse inheriting your life insurance death benefits, IRA, or 401(k) accounts, rather than your children. He may share these assets with a new family, essentially disinheriting your children.
These situations happen, which highlights the importance of updating your plan and reviewing beneficiary designations and titling on all accounts on a regular basis. Have you called your estate attorney for an appointment yet?
Now that you’ve developed an investment strategy and integrated your assets with your updated estate plan, it’s time to consider tax planning. As hard as it is to focus and make decisions in the first year of divorce, it’s important because there may be some terrific tax planning opportunities. For example, you may have been awarded substantial assets but do not have earned income. In this case, your tax bracket may be lower the first year than it will be in future years due to a partial year of investment income. It might be an ideal time to consider converting a portion of your pre-tax accounts (IRAs) to post-tax accounts (Roth IRAs). The downside of doing so is that taxes are due at the time of a “Roth conversion,” but the benefits are an attractive tax rate and the Roth IRA assets will grow tax-free for the remainder of your lifetime.
In addition to investment management, estate planning, and tax planning, other areas of your financial plan may need attention. These include debt management, insurance, educational funding, charitable giving, and succession planning.
Rebuilding your financial plan after divorce can be overwhelming, but by focusing on key areas like investments, estate planning, and tax planning, you can lay the foundation for a secure financial future. Consider consolidating accounts, develop a diversified investment strategy, update your estate plan to protect your children’s inheritance, and consider tax planning opportunities. Remember, taking a holistic approach and seeking professional guidance can help you navigate the complexities of post-divorce finances and ensure long-term financial stability.
This is intended for informational purposes only and should not be construed as personalized investment or financial advice. Please consult your financial and investment professional(s) regarding your unique situation.