Mistakes Women Make in Financial Matters During The Divorce Process
Lifestyle changes resulting from divorce are common, but there are steps you as a woman can take to avoid common mistakes.
According to facts, women divorce 1.5X more often than men. However, these statistics do not always show women’s full readiness to face the financial reality of separation. Frankly, the average woman experiences a drop in her standard of living of almost 30% after divorce, while men often experience a 10% increase.
After divorce, some lifestyle changes are often unavoidable. And it’s a very emotional time for a lot of people. This is why it is so important to work with a holistic wealth advisor as you make decisions that will have huge consequences for your financial future.
Here are several common mistakes women make during divorce, along with steps you can take to avoid them.
Making Emotional Decisions
A divorce can be one of the most emotional experiences of your life. And decisions made during the divorce process can have devastating financial consequences. One common and emotional mistake is when a newly single couple keeps the family home — only to find that the home has to be sold to maintain liquidity. Although married couples are entitled to a capital gains tax exemption of $500,000 on the sale of a primary residence, you can only exclude $250,000 as a sole owner. Second, by not selling and dividing the proceeds as part of the divorce settlement, you will bear the entire burden of transaction costs — including the 6% Property Agent fee — which should be shared jointly. Finally, although every circumstance is different, the equity in your home may not be the ideal vehicle to support your long-term goals.
Waiting to Consult a Financial Expert
During the divorce process, it is common for many divorcing women to rely solely on a family law attorney to evaluate the long-term impact of various settlement options, and seek the help of a post-divorce wealth advisor to create a financial plan. This delay was a big mistake. Your family law attorney is the ultimate expert in navigating your divorce settlement, but collaborating with a qualified financial advisor on the details of your marital assets and how each asset may impact your financial goals is critical — and much more impactful before you make any irreversible decisions . .
To optimize your settlement, your team of attorneys must have a comprehensive understanding of the assets at play. These include tax consequences, earning power, transaction costs and liquidity characteristics. For example, stock options, private equity, business interests, real property, retirement accounts and all have different attributes and potential challenges that must be considered in your settlement.
Not Accepting New Living Standards
With a marital balance sheet split in two and two lifestyles to fund, changes are often on the horizon — regardless of the terms of the divorce settlement or an individual’s net worth. Failure to adapt to these new circumstances can be difficult, as pushing too hard now can lead to liquidity problems, or even worse, in the future.
In addition to working with your wealth advisor to create a plan to achieve your goals, one best practice is to strive to live not within — but below — your means. Generating a surplus each month to replenish savings and investment accounts that, could potentially be halved during the divorce process can help give you peace of mind, knowing that you are on track for a secure financial future. And it’s the best lifestyle of all.
Underestimating Liquidity Needs
Another mistake women make during the divorce process is failure to maintain liquidity — in other words, not having access to enough cash. Because legal costs tend to increase in proportion to the financial balance at stake, the inability to fund divorce proceedings without relying on your spouse can have very negative consequences for your legal strategy. Second, separation often requires a series of unexpected costs — which may include new housing, furniture, cars and small items.
What is more important is maintaining long-term liquidity to fund your goals — and this should be a key concern when reaching settlement. You should remember:
- Real estate can generate high carrying costs and on average only appreciates along with the real inflation rate.
- Retirement accounts have significant penalties and tax consequences if they are liquidated.
- Cars, boats and furniture are assets that suffer from depreciation.
Even investments that have the potential to produce profits, such as shares in a business or limited partnership, should be compared with liquid assets that you can use now to build long-term security.
