After a long marriage, women facing divorce struggle with knowing how much spousal support to seek. You can help yourself by understanding your future cash flow situation.
Make a detailed list of the living expenses you will have after your divorce. Identify your expenses. Create a separate list of expenses you wish to cover for your children. Look over your bank statements and credit card statements for the past year. Identify those expenses that will not change after your divorce. Then make a list of spending amounts that will change after your divorce. Will you have a new cell phone contract? How about your vehicle insurance premiums? Are you expecting to have a different home?
Estimate how much of your living expenses can be covered by non-wage income. If you have investments, the income on those may change after you start making investment decisions on your own or are working with an investment advisor. Consider whether you might have Social Security income or pension income. Estimate how much child support you think you will receive.
Will you have income from a job? How much you can earn in a career? If you already have a career, this step is relatively easy. If you are just now entering or re-entering the workforce, this step is more challenging. Consider seeking advice about your employment possibilities from a career advisor.
To find out how much spousal support you might want to ask for, add your estimated sources of income together and subtract your anticipated expenses. If the result is a negative number, that is your starting number for how much spousal support to seek. Weigh this against the Texas spousal support guidelines and the amount your soon-to-be-ex husband can manage. Work with your divorce attorney to fine-tune your approach.
I can refer you to Brazos County divorce attorneys as well as career advisors and investment advisors.
Texas spouses whose divorcing husbands or wives have controlled the income tax returns during the marriage often worry about having the IRS come after them for back taxes and penalties years after the divorce. If this sounds like you, you can benefit from knowing about innocent spouse relief and an indemnification clause to protect yourself.
When you file a joint return, each of you and your spouse are liable for all of the taxes, penalties and interest owed on the return. After your divorce, you will still be on the hook for the unpaid taxes that apply to your joint tax returns from the years you were married. That is, unless you can qualify for innocent spouse relief.
Early in your divorce, talk with your attorney about getting an indemnification clause in your divorce settlement. In Texas, this would be included in your divorce decree, agreement incident to divorce or a mediated settlement agreement. It would say that your ex-husband or ex-wife is required to reimburse you for future tax liabilities related to prior tax returns.
By the way, the IRS does not care about this indemnification clause. They can still go after you for any taxes, penalties and interest owed from either you or your ex.
I help Houston divorcing couples find mutually agreeable settlements. Frequently, part of that settlement is finding suitable health insurance for the unemployed spouse.
I give my clients homework. Get this document, copy these statements and so forth. The most neglected homework assignment is to obtain health insurance quotes. Perhaps it is a scary thing to do. I give them a referral to a great health insurance agent, but still, they procrastinate.
Many can get COBRA through their spouse’s employer. But it is important to check out all your options. COBRA coverage is usually more expensive than health coverage for employees, because the employer typically pays part of the premium for the employees. If you are the divorced spouse who is covered with COBRA, you are going to pay the entire premium without the benefit of an employer subsidy.
As a former spouse, you can elect to continue the COBRA coverage for as long as 36 months. Check with your spouse’s Human Resources department for the exact length of time. In Texas, your coverage might be only for 18 months. The plan administrator for the health plan has about 14 days to notify the person of their right to get the COBRA coverage. The person needing COBRA coverage must contact the plan administrator within 60 days of the divorce or legal separation.
Most importantly, get your health insurance options straight early in the divorce so you can make an informed decision and negotiate for the premium expenses during the property settlement discussions.
Many of my clients in Houston and College Station are facing a health insurance answer during their divorce. They are unemployed and rely on their soon-to-be-ex spouse for health insurance coverage. What to do if you are in that situation?
1. Find out if COBRA coverage is available under your spouse’s employer.
2. In Texas, there are two kinds of COBRA, federal and state. The former offers 36 months of coverage after divorce while the latter offers 18 months. Find out which one is applicable to your situation.
3. Get a quote on your cost of COBRA coverage from the employer.
4. Seek quotes on individual policies from an independent health insurance advisor. (If you need a referral in Houston, send me an email)
5. Compare the coverage and costs of the COBRA and the individual policies.
6. Be very careful with your timing when changing health insurance coverage from your current coverage to either COBRA or individual policy. Do not have even a day of lapse.
Most people want to put off this project. It seems intimidating. Break it down into these six steps. I cannot emphasize enough how important this issue is for your future financial security.
If you are divorced and were married at least 10 years to your ex-spouse, you are entitled to a spousal or survivors Social Security benefits.
The following is from the 2011 AICPA CPA’s Guide to Social Security Retirement Benefits.
For ex-spouses …
You must have been divorced from this ex-spouse for at least 2 years before you can apply for the benefits.
You have not remarried before you turn age 60.
If you remarry before age 60, you will still qualify for the survivors benefit if your subsequent spouse dies or ends your marriage in divorce before you apply for the survivors benefit.
Your benefits as an ex-spouse do not change or affect on what children or new spouse (with your ex) could obtain.
As an ex-spouse, you can start collecting spousal benefits before the working spouse has begun taking his/her benefits.
If you remarry before age 60, you get to choose the better Social Security spousal benefits. You can compare your benefits under the ex-spouse rules and the current spouse rules and then pick the best.
Is Guam a foreign country? Getting the wrong answer could have cost Steve his father-son relationship.
Steve and Marci have two very young boys. In the middle of their collaborative divorce in College Station, Texas, Steve and Marci needed to agree on who would have primary custody if they lived in different locations.
They came into the meeting prepared. They had agreed that Marci had the boys if she lived in Canada or the U. S. If she moves anywhere else, the boys stayed with Steve. With her company folding, Marci had already announced that she would take a job “anywhere in the world”.
Steve is intending to follow Marci and his boys to nearly anywhere in the U.S. or Canada, but not anywhere in the world.
I asked them if they wanted to define the United States. They thought that an odd question. Did they want to stick with the continental U.S. and exclude Hawaii and Alaska? They decided to include Alaska and ditch Hawaii.
Knowing Steve wanted to keep his sons on this continent, I asked him how he felt about Guam. He looked surprised and Marci said, “I could live there!” Neither of them knew that Guam is a territory of the U. S. But then, they grew up in Eastern Europe where American geography and government were not strong subjects.
They agreed to define the U.S. as the lower 48 states plus Alaska. Had they not tightly defined the U.S., they could have ended up with Marci moving their sons to Guam or another U.S. territory.
I can hear the judge now, “Guam is part of the United States. You should have thought of that before you agreed to this.”
Four in ten Americans are at risk for not being able to maintain their lifestyle in retirement. Are one of them?
If you are contemplating anything other than a collaborative divorce, you won’t find the answer in that process. In fact, you will have more chance of being one of those four people after your divorce.
In the collaborative divorce process, you get to have a neutral CPA on your team. For less money and more expertise, your neutral CPA will quickly and effectively do the financial work. Attorneys are not quick and effective with numbers. They also don’t give financial advice. One thing your neutral CPA can do for you is analyze your chances of being one of those four Americans.
All my collaborative clients are worried about their financial future. Divorce is scary. Divorce is an unplanned large expense. Will you be able to retire? Will your children get to go to college? Will you be able to live like you have been?
These are all questions that your neutral collaborative divorce CPA can address.
Don’t be one of the four Americans who are looking at a reduced retirement lifestyle. Get your answers now.
I recently had a few divorce cases where the couples spend more than they can afford. The crazy thing is that they refused to see how dangerous this is.
I read in the news that Americans are saving more and spending less. Not divorcing Americans. Don’t these people want to retire some day?
Hello, readers! If you are facing divorce and are not a billionaire, then you are going to need to cut back on your spending. I’m sure you feel you deserve to keep your current lifestyle. Odds are that your current lifestyle wasn’t sustainable anyway.
I’m talking about people with incomes ranging from modest to a million dollars a year.
Are you socking away 10% of your income? If not then review your spending. Look for ways you can cut back. Examine your spending habits and then cut back.
Stop getting manicures and pedicures. Do them yourself. The more you do them, the better you get at it. Invite girlfriends over and make it a party.
Are you overpaying for insurance? My husband and I had our insurance reviewed last month and saved $500 a year.
Look at your summer clothes. Did you wear them all? Take the ones you didn’t wear to a consignment shop.
Is your divorce going to postpone your retirement? Are you going to have to give up your dreams of relaxation or travel?
In College Station and Houston, stalled retirement plans are common in the list of divorce financial concerns. Your spouse is trying to get all the IRAs. Your spouse won’t share the pension. Even if you could get your spouse to listen to you and agree to share, half the nest egg might not be enough for your retirement.
You can use an retirement shortfall calculator to project when you will be able to retire. (You can also find these calculator links on my blog under Website Links.)
Tips for using the calculator:
Before you start popping numbers in the boxes, first read the “Definitions”. They really do matter.
Rates of return – choosing the number for this box is like using a crystal ball. I recommend that you fill in all the other boxes first and then work on this one. First put in 2% and see the result. Then put in 4% and see how the result changes. Take it up to 8%. It looks better there, doesn’t it? Actually getting your estimated rate of return in real life is a whole different matter.
Federal tax rate – this is your “marginal” tax rate, the rate of tax on your highest taxed dollar. Calculate that with a Marginal Tax Rate Calculator.
Number of years in retirement – assume you will live 10 years longer than the age of your longest living parent or grandparent or age 95.
Expected inflation rate – use 3.0% or use the default of 3.1%.
Warning: Many people avoid thinking about retirement. Don’t do that. We see lots of articles about inadequate retirement savings in many households. Divorce can make this situation worse. Reverse that trend by educating yourself now.
This weekend I read an interesting article in the Wall Street Journal, The Incredible Shrinking Everything by Joe Queenan. He tells us that nearly everything is shrinking. Yeah, yeah. I knew about the juice containers shrinking. What I hadn’t realized were the shorter solos by Eric Clapton and the lower basketball scores from 2000 to 2011. Shrinkage.
His column reminded me of the shrinkage I see in my business. Bank accounts shrink. Patience shrinks. Lifestyles shrink. What surprises me is the frequently unrealistic optimism of people in divorce.
Sure, everyone is hurt and angry and scared. But they are strangely optimistic (or blind) about their financial future. They really don’t grasp how much their financial security will shrink when they create two households from one.
Nobody likes to cut back on their lifestyle. Not even the wealthy. It’s hard to do. I have come to the conclusion that we humans have great difficulty accurately imagining negative change. We can talk about it. We can rationalize the change. But we can’t seem to feel it until it hits us between the eyes.
So, how does this relate to divorce financial planning? I recommend that if you are considering divorce, you financially pretend you already are there. First you have to figure out your post divorce cash flow. Then you have to actually live on less income for a while. Try it out for a month. Eat out less. Don’t buy those shoes. Shop for store brand items. Clip coupons. Live the shrinkage. It will make your divorce just a little bit easier to handle. You will be better prepared for financial reality.