Marriage & Money: Part III – Dealing with Divorce

Welcome in to Mr. Stillman's Opus. Glad to have you on the podcast for another great episode as we continue our three-part series, closing it out today, Jon, with that dreaded D word, divorce.

You want to spell it out like Tammy won it? Sure, we can if we want to, but I think more importantly, we spell out the financial concerns and considerations that someone that is going through this process and we, you know, we joke getting into this, but it is a very serious and emotional and trying process for a lot of people and one of the biggest events you'll go through in your life in many cases. And with that, Jon, comes a lot of emotion and the emotion and financial decisions do not go hand in hand, do they? No, usually not things that you want to combine, emotions and numbers. Obviously, every divorce is going to be different, sometimes very amicable. Yep, let's just split it right down the middle and off we go. Other times, it's going to be more of a fight.

I've seen just about every flavor. I do have to tell you my favorite divorce story to the extent that one can have a favorite story about divorce. So, this was a lady I'd met with probably close to a decade ago. She'd just come in for sort of like a one-time consultation thing after divorce.

So here was her story. She'd been, when they got married, husband was like a general manager of a TV station or something. This was in the late 80s.

So he was making a six-figure income. She was a school teacher making, at the time, probably 20-some thousand dollars when they got married in the late 80s. They were married for 15 years, pretty abusive, violent.

In fact, the night she finally left, she was hiding under their bed, locked in the bedroom, and he was shooting at the bedroom door. She got out the window and that was when she finally said, okay, time for a divorce. So she goes to talk to an attorney the next day. The attorney says, all right, let me look into some things.

We'll get back with you. The attorney calls back and says, well, you're actually not married. She's like, what are you talking about? We've been married for 15 years. She said, no, like there's no record of you being married. There's no marriage license. You lived in Florida and Tennessee were the states you lived in together, neither of which recognizes common law marriage. So you're not married. Like you don't have to get divorced.

You can just leave. And so she asked your husband about it. He said, yeah, I never turned the marriage license in, never filed it when we got married. Well, of course his reasoning at the time was I'm making $100,000. She's making 20.

So if this doesn't work out, like I don't want to have to split anything with her. Right? Well, in 15 years of their marriage, guess how things had changed. He was unemployed and she, through some like bizarre chain of career moves, was now an executive at a large defense contractor. And so now she's making three or $400,000 a year. He's making nothing. And now guess what?

She can just walk away and give him absolutely nothing because he didn't file the marriage license way back 15 years ago. Amazing. Sounds like it could happen to a better guy. It's the most poetic job.

That's why I say it's my favorite poetic justice. Wow. What a story to start things off with, John.

All right, let's jump into it. Then again, if you have questions for John, who is a chartered retirement planning counselor at Rosewood Wealth Management, you can call or text 800-545-2991. So we're talking about financial considerations and things, some tips and guidance to help you make informed decisions and hopefully maintain some financial stability. And that's key in the divorce process much more maybe than marriage and remarriage as you're going your separate way and kind of restarting your life. You want to make sure you're on solid financial footing. So let's start off, John, with the first really thing you think about with divorce is dividing those assets. Yeah. So we'll assume that you are legally married when we're talking about the dividing of assets.

A couple of things that I see people make mistakes on. So a lot of times, more often than not, I would say wife is going to want to keep the house. And so what she's going to do is essentially buy him out and she'll do that through letting him have more of the liquid assets or investments. So let's say there's a million dollars in bank accounts and retirement accounts and the home is worth $500,000. Well, a lot of times she'll say, I want to keep the house. So instead of us splitting that that other million 50-50 and each getting $500,000, she might say, well, I'm only going to get $250,000 of that. He'll take $750,000 and that will be me buying him out of the house.

So sometimes we see that, which could be the way to go. But a lot of times you get two or three years down the road and you say, ah, you know what? This is more house than I need. And quite frankly, now that I think about it, there's a lot of bad memories in this house. I thought I'd want to keep the house because it would give me security. Now I want to get rid of the house. Well, might've been better off to have just sold the house during the divorce and then had more liquid assets to work with along the way.

Again, not always the case, but it's one of those things we don't want to make, just make a knee jerk reaction of, okay, let me keep the house and I'll do what I have to do to make that happen. Another issue that we see in dividing assets is retirement accounts. So as an example, let's suppose that wife has $400,000 in her 401k. Husband doesn't have a 401k, but they do have $400,000 in some after tax investments. They'd just been putting money into a brokerage account. Well, it would be really easy to say, all right, well, this 401k is already hers.

She keeps that. He'll take the 400,000 in the brokerage account. Well, even though they're both $400,000 account balances, that's not an even trade because her 401k is all going to be taxed as income. When she takes it out, he's only dealing with capital gains on the brokerage account. So we have to think about tax implications too, of whatever we're splitting up.

All right. So some key considerations right off the bat in terms of dividing assets and liabilities, then you got to think about the children, right? And alimony, child support payments, this can be a big chunk of money as well.

Yeah. And more often than not, I would say I see this kind of happening in a graduated fashion where, you know, let's suppose divorce is happening at age 50. You still have some kids on the payroll. Maybe husband is going to be paying what seems like a lot for the first couple of years because it is alimony and child support. After a couple of years, the kids are 18. There's no longer child support in the picture. And then maybe it's just the alimony until, you know, whatever agreed upon age they have. Maybe it's for 10 years. Maybe it's until she's 65.

Could go a lot of ways. We also have a couple of cases where a retirement pension has gotten split as part of the divorce decree. So instead of the husband getting his $5,000 a month pension, he's actually going to get $2,500. Ex-wife is going to get $2,500. Some issues there we have to think about too because now what happens if your ex-spouse dies and you were getting half of their pension?

Well, now your income is going to go away. So now you're in this odd position of rooting for your ex-spouse to live a very long time. So we have to have a plan for that.

We actually have a few folks in that position where we have to have a solution. What are we going to do to replace that income if and when the ex-spouse dies first? In some cases maybe we go the life insurance route. In fact, in one case, part of the divorce decree is that the ex-spouse is required to keep life insurance on himself so that she can be made whole if she loses his half of the pension. It can get complicated, but it's just another thing to think about if there's indeed a pension in the picture. We were talking about alimony and child support though, and I got off on that. So it's just important to understand how those numbers change over the years because usually the alimony isn't going to go on forever. So what is going to be our plan? If you're the person receiving the alimony, what's going to be our plan when that runs out?

All right. Well, we talked about this quite a bit with the remarriage aspect and that's doing a lot of paperwork in terms of updating names, beneficiaries, insurance, different documents. I guess there's just as much of that in this process to make sure, again, you're taking off people that you don't want to be included and then you're really looking out for yourself.

Yeah. So we talked about this in the remarriage episode that you're referencing. You've got to make sure that beneficiary designations are updated. And it could be that the divorce decree says, no, you have to leave the X on this particular life insurance policy or this particular retirement account. That might just be part of the negotiating process of splitting the assets up. But if that's not part of the agreement, then you want to make sure that all of your beneficiary designation, so both life insurance and retirement accounts, you want to make sure those are updated to reflect where you want that money to go. Now in a lot of cases, if you're not getting remarried yet, you might keep the X on those accounts because then X is going to have full custody of the kids if something happens to you. And you want the X to have the money anyway because they'll be raising kids alone. So it's not an automatic, all right, we're divorced.

Let's take him or her off of everything. But that might be the case. So you want to make sure to review all those designations because they do override the will. It doesn't matter what your will says.

If the IRA has your X as the beneficiary or your life insurance has the X as the beneficiary, that's where the money goes. So important to remember that aspect of it. All right. So along with these actual physical things you need to do, then you have the emotional and mental side of it, right? You have to actually change your mindset and think about the financial planning and the retirement planning as an individual now as opposed to for so long maybe doing that as a team or as a family.

Yeah. So the challenge here for a lot of people is before you were planning on having two social security benefits, now you just have one. You were thinking about having $800,000 in retirement accounts.

Now you just have 400. But the reality is like your expenses haven't been cut in half. It cost you probably 70 to 80 percent as much to live as a single person than it does as a married person. So you still need income but now you have less assets to work with to make that happen. So that's a challenge. The other thing is you're no longer filing a joint tax return.

You're filing a single tax return which is going to put you, even if your income was the same, is going to put you on a higher tax bracket. So that can be a challenge too. And that's usually the biggest things that we have to overcome when we're doing planning for a recently divorced spouse is how do we adjust to all this? It's not only a mental mindset shift.

It is a financial shift too just because of how the numbers have changed. Anything else, John, divorce wise? I guess also kind of along those lines, what role do you play as an advisor? I know the attorney plays a key role in this process but as a financial advisor I guess you need to be in on a lot of these discussions, right? Well yeah and unfortunately what usually happens is people come to us after the divorce has happened like when they make their first appointment here. It's after the divorce and it's okay where do I go from here? What would be a lot better is if people would come in while they're in the negotiations of how do we split all this up because generally the attorney is going to be good at fighting for you but not necessarily understanding all the nuances of what's going to be best for you. So you might say I want this or the attorney might say you should get this.

Well that may or may not be what you actually need and usually we can point those things out in advance and you end up with a much better outcome because you planned ahead instead of just saying all right well here's my half here's what I got where do I go from here? Well make sure again they always take those steps as early as possible not only with divorce planning but in your financial planning the better you can start there's no better time than now right so the earlier you start the more chances you have to be successful over the long term. So if you want to get in touch with John Rosewood Wealth Management you can call 800-545-2991 call or text again 800-545-2991. So hopefully this three-part series will help you out or someone you know someone close to you maybe a loved one family member point them in the direction of the podcast if they're going to get married soon remarriage or divorce three big major life events that come with some big financial decisions and hopefully we've provided you with a little bit of clarity on that during this process of these three parts. John as always thank you for your time.

Thank you we'll do it again soon. Carolina Wealth Stores doing business as Rosewood Wealth Management is a registered investment advisor in the state of North Carolina. The material presented is intended to be general information and should not be construed by any consumer as the rendering of personalized investment advice.