Ask Linda: We're Getting Divorced. Now what?
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Dear Linda,
My spouse and I recently decided to get a divorce. What should we expect with regards to the divorce process and its financial implications? I am particularly concerned about how my retirement plan will be affected.
Separated Sam
Dear Sam,
We outlined the most common ways to obtain a divorce below, including the estimated price for each process. While this is not meant to replace your own due diligence, it should help you get started.
Here are the four most common ways to obtain a divorce.
1) Do-it-yourself (total cost is typically under $2,000)
No outside professionals are involved, therefore, no one is looking out for your best interest except you.
It can be the quickest and cheapest option.
This is not a good option if you are concerned about your spouse hiding assets as there is no subpoena power.
2) Mediation (total cost is typically under $10,000)
You and your spouse hire a mediator - a neutral party.
The mediator's job is to have you and your spouse come to an agreement, not necessarily to ensure an even split.
Again, this is not a good option if you are concerned about hidden assets as the mediator has no subpoena power.
3) Collaborative (total cost is typically at least $25K - $50K)
Both you and your spouse will hire your own attorney to represent your respective interests.
A neutral financial professional, or Certified Divorce Financial Analyst (CDFA®), is also hired to ensure the assets are split as fairly as possible.
If your spouse is withholding information, your lawyer can file paperwork with the courts requiring each party to disclose all assets and pertinent information.
If an agreement is not reached, you will need to go to litigation, and the attorney you selected for the collaborative process is disqualified from representing you during the litigation process.
4) Litigation (total costs vary greatly, but typically at least $25K - often much higher)
Both you and your spouse hire your own attorney to represent your respective interests.
There is a subpoena of records, so it is much harder to hide assets.
The terms of your divorce will be public, unlike the previous 3 approaches.
Why we like the collaborative divorce process.
While every situation is different, we typically recommend clients at least consider the collaborative divorce process because you have an advocate (your lawyer) and a neutral financial person (the CDFA®) to ensure there is an even split of the assets. A CDFA® is a financial planner who has specialized training to properly analyze the financial issues relating to divorce. For example, the CDFA® will review the different account types and how they are taxed differently. When splitting $1M in half, you don't want one person to end up with $500K in a 401k and the other $500K in a brokerage account without understanding that this is a potentially uneven split after taxes. The 401k is fully taxable upon distribution while the brokerage is not, so that difference needs to be factored into the calculations.
Even if you decide the collaborative process isn't for you, we still recommend you consider engaging a CDFA® on an hourly basis to confirm that you completely understand the financial ramifications of the proposed split and settlement.
PWR does not have any CDFA®s on staff, but we can point you in the right direction if you need help.
Where you should start.
Be clear on what you spend each month.
The biggest regret we hear from divorcees is that they did not handle the family finances during their marriage, and therefore feel anxious about making any financial decision. If this is your situation, start by tracking your expenses. It is the first step towards having a clear picture of your finances and it will enable you to evaluate options during the divorce process, such as if you can afford to keep your marital home or other non-income producing assets.
Start building a support network to help you through this time.
Build a team of people who will look out for your best interests. This may include family members, friends, a counselor, an attorney, a tax preparer, and a financial advisor.
Once the divorce is finalized, update your financial plan.
After the divorce, you may need to adjust your savings amounts or living situation based on your change in income and assets. The sooner you make these adjustments, the less painful the changes tend to be. Have a CERTIFIED FINANCIAL PLANNER TM help you do an evaluation of your new circumstances.Updating your plan will give you the confidence to make changes and move forward with your life.
I wish you the best,
“Ask Linda” is a monthly personal finance column where the founder of Planning Within Reach, LLC, Linda Rogers, picks one question from her readers and publishes a detailed answer with the hope that it benefits others. If you would like to ask Linda a question, email her or contact her on Twitter.
Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.
Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.