Facing Divorce? Address These Financial Priorities First
By Guli Fager, Financial Advisor
Divorce can cause an unprecedented strain on families and relationships. While the emotional toll of dissolving a marriage may be top of mind, there are important financial considerations as well.
Zero in on expenses: Make a list of all recurring costs, both “nondiscretionary” items (rent/mortgage, utilities, taxes, student loan payments, insurance, childcare, tuition) and discretionary (food, meals out, clothing, pets, shopping, travel, entertainment). If you haven’t paid much attention to the outflow of money in your household, get access to bank and credit cart statements so you can review a few months’ worth of transactions.
If your financial accounts have all been joint, open a separate account for yourself. If you anticipate major expenses like security deposit, down payment, or a new car, start setting aside money in a separate bank account.
Update Retirement Funds & Life Insurance: If you are allocated some of your spouse’s retirement funds through a QDRO (Qualified Domestic Relations Order), you will need to open an IRA for yourself in which you can deposit those funds. Toler Financial Group can help with this. If you have your own retirement plan, you’ll need to update the beneficiaries – the default is usually your spouse and must be updated post-divorce.
If you are close to retirement age and worked part time or not at all for much of your marriage, you might be eligible for a higher social security benefit based on your ex-spouses’ work history. Read more here from the Social Security Administration: Ex-Spouse Benefits And How They Affect You
Life insurance policy beneficiaries should also be reviewed and updated. Insurance policies can be transferred in a divorce so, for example, you can be the owner and beneficiary of a policy covering your ex-spouse’s life. You can pay the premium yourself or the premiums can be required by the divorce decree to provide protection for child/spousal support in the event of your ex-spouse’s death. This can be an important safety net after divorce, especially if there are children who will need to go to college.
If you didn’t have life insurance before and will be receiving child/spousal support, consider taking a life insurance policy that covers your ex-spouse so that if they pass away before the children reach adulthood, there will be financial resources available to replace that support. Toler Financial Group can advise on insurance strategy.
Estate Planning: if you had a will, powers of attorney and other estate plans together with your ex-spouse, those documents need to be updated. If you didn’t have them, establish them now. Our firm works extensively with LGBTQ inclusive estate and family law attorneys and can recommend an attorney if you need one.
Frequently Asked Questions About Divorce and Financial Planning
What financial steps should I take during a divorce?
One of the first financial steps during divorce is creating a clear picture of your expenses, income, debts, and assets. Reviewing bank statements, credit card activity, insurance policies, retirement accounts, and estate planning documents can help you prepare for financial changes after divorce.
Should I open a separate bank account during a divorce?
Yes. If most finances were previously shared, opening a separate checking or savings account can help you establish financial independence and prepare for upcoming expenses such as housing deposits, legal costs, or vehicle purchases.
How do I create a post-divorce budget?
Start by separating your expenses into essential costs — such as housing, utilities, childcare, insurance, and debt payments — and discretionary spending like dining out, travel, shopping, and entertainment. Tracking several months of spending can help create a realistic budget after divorce.
What happens to retirement accounts in a divorce?
Retirement accounts may be divided through a Qualified Domestic Relations Order (QDRO). If you receive retirement funds from a former spouse’s account, you may need to open an IRA or other retirement account to receive those assets properly.
What is a QDRO in divorce?
A QDRO, or Qualified Domestic Relations Order, is a legal order used to divide certain retirement accounts during divorce without triggering early withdrawal penalties or taxes when handled correctly.
Do I need to update my retirement account beneficiaries after divorce?
Yes. Beneficiary designations on 401(k)s, IRAs, pensions, and other retirement accounts should typically be updated after divorce, since many accounts automatically list a spouse as the default beneficiary.
Can I collect Social Security benefits from my ex-spouse?
Possibly. If you were married for at least 10 years and meet other eligibility requirements, you may qualify for Social Security benefits based on your former spouse’s earnings record.
Learn more through the Social Security Administration.
Should I update life insurance after divorce?
Yes. Divorce is an important time to review life insurance ownership, beneficiaries, and coverage amounts. Life insurance may also be used to protect child support or spousal support obligations in the event of a former spouse’s death.
Can I keep life insurance on my ex-spouse after divorce?
In some cases, yes. Divorce agreements may allow one spouse to own and maintain a life insurance policy on the other spouse to help protect ongoing financial support obligations or provide security for children.
Why is life insurance important after divorce?
Life insurance can help replace lost child support, spousal support, or household income if a former spouse dies unexpectedly. This financial protection can be especially important for families with dependent children.
Do I need to update my will after divorce?
Yes. Wills, powers of attorney, healthcare directives, trusts, and other estate planning documents should generally be reviewed and updated after divorce to reflect your current wishes and relationships.
What estate planning documents should be updated after divorce?
Common estate planning updates after divorce include wills, financial powers of attorney, healthcare directives, trusts, guardianship designations, and beneficiary designations on financial accounts and insurance policies.
Should divorced individuals work with a financial advisor?
A financial advisor can help evaluate budgeting, retirement planning, insurance needs, Social Security strategies, investment accounts, and long-term financial goals during and after divorce.
How can divorce affect long-term financial security?
Divorce can impact retirement savings, housing costs, taxes, insurance, debt obligations, and long-term financial planning. Early financial organization and professional guidance can help reduce uncertainty and support long-term stability.
