As a married couple, parties often plan their retirement income and assets years in advance. But what if the parties divorce? Clients often wonder will I have enough to live on post-divorce?
Before a divorce is finalized every client should complete a basic exercise so that they will know before the final decree comes what their future financial outlook will look like after the divorce is finalized.
For instance, a client should begin by making a list of their annual expenses. I always advise clients to list all expenses including vacations, gifts, charity and necessities. The client’s fixed costs might include utilities and car expenses in addition to variable costs such as, taxes, a vacation or a luxury item. A completed budget may always be modified but recognizing the costs in advance will help focus on which expenses may need to be cut back after divorce.
Once a thorough budget has been completed, the parties should run different financial models which take into consideration income and expenses over the next 5 – 15 years. This will allow the client to review possible assets they might need in the divorce to meet their goals, identification of how long they may have to work, selection age of social security benefits, and whether they will need alimony. Modeling of financial information in advance of divorce is a powerful and useful tool that will assist the client in understanding what their financial future will look like as well as realistic expectations.
For example, a client might forego receiving a rent producing property in a divorce in exchange for an investment that pays regular dividends. Maybe the client doesn’t what to deal with the hassles of being a landlord and maintaining a property. Likewise, if the real estate market is doing well, a homeowner may want to sell their primary residence and downsize to save money on future capital expenses they might incur with an older home such as a new roof.
After divorce, the client should continue to review their forecast since expenses may increase, properties may have to be sold, or investment outcomes may be less than what was expected. A regular review of the client’s budget after divorce will assist the client in meeting their future goals and relieve some of the stress from their financial future.