One of the first steps when filing for divorce is gathering financial information. Tax forms, retirement accounts, earnings, assets, debts, expenses. Can your divorce attorney help you make sense of it all? Should you get guidance before you sign the papers? Divorce can be a very costly experience and not just the billable hours.
David Bach, Vice Chairman of Edelman Financial Services and New York Times best-selling author of Smart Couples Finish Rich says, “Smart couples skip couples therapy and go straight to a financial advisor if they’re fighting over money. Sometimes a financial advisor can resolve fights about finance and the couple may even be able to fix the marriage,” says Bach.
Bach is launching a four-city Smart Couples Finish Rich® The Retirement Seminar series (LA, Chicago, Detroit, and Boston) based on the “Seven Steps to a Secure and Happy Retirement that will include tips and advice for financial topics facing couples.
But, if you’re already in the throes of divorce, the financial expert advises putting together a financial team. Divorce is one of the biggest financial decisions most people will ever make. If you have assets and income, you really need to work with a financial advisor, accountant, and an attorney.
Isn’t hiring an attorney enough? A divorce attorney’s job is to divide assets and get contracts done. Arming yourself with valuable information leaves you in a better place to make the right choices. Coming into negotiations without the right tools can be a very expensive lesson for those of us who skipped this step.
And divorce itself can be a very expensive, lengthy, and emotional process. Most couples divorce during prosperous times when they can afford to split, without considering long term costs and possible future downturns. “$50,000 in child support till the child reaches 21 is going to end up costing $800,000 at present value. You’ve got to project what would be needed to earn in a business or as an employee, to illustrate the cost of each decision,” explains Bach.
Bach says you need to “really run the numbers 5, 10, 15 years out, to do a present and future value calculation, especially if you have cost of living increases written into the agreement. A financial advisor can run the numbers to see what that will look like in 15 years.”
When it comes to divorce, most of us don’t do the nitty gritty financial analysis necessary to make the best decisions, especially if one of the partners was in the dark financially during the marriage. “The biggest reason you need a financial advisor and in depth accounting is to know what’s there before you divide the assets,” adds Bach. If there’s not an accurate interpretation of the assets, you won’t often get half, which Bach says is the single biggest mistake most women (and some men) make.
Most divorcing spouses probably wonder if the higher earning spouse may be hiding assets but we may also not think through the economic consequences when dividing assets. A $1 million house doesn’t really translate to $1 million when the partner goes to sell the house. How much equity is in the house? Was there a second or third mortgage? The cash amount may end up as $730,000 after broker commissions and taxes. A financial advisor will walk you through the assets and help parcel out assets you might not even want, especially when dealing with retirement accounts. “The courts may allow a couple to divide a $500,000 IRA but maybe one partner would benefit from $250,000 in liquid assets,” says Bach.
Additional child expenses such as private school may also be part of divorce negotiations. “We sometimes make these decisions in a vacuum when things are going well. What if one party agrees to pay for 10 years of private school and now that party has remarried and had more kids or lost a business? The terms can be hard to renegotiate,” says Bach.
What happens when parents have income disparity? “If you’re the under-earner, you might want to negotiate for apportionment or for the extras. If you’re the over-earner, you really have to think through whether you will be able to make payments five or 10 years from now,” advises Bach.
No matter which side of the financial equation you’re on during a divorce, working with a team that includes a financial analyst and accountant will provide you with the necessary tools to make informed decisions that could impact your finances for decades to come.