Divorce Without Going Broke
By Janet Bouma, CDFA

Fear of Going Broke

One of the biggest fears that one faces when going through a divorce is the fear of going broke! And one of the biggest mistakes I see spouses make is thinking that all assets are created equal. Clients frequently come to me and say that they are considering the following equitable distribution proposal: Husband keeps his retirement account(s); Wife keeps the house. On an emotional level, the choice is understandable--the husband has worked for many years at his job and feels that his pension is "his." The wife, especially if the kids are still at home and in school, is hesitant to move herself, and the children, to a new house, new school district, new friends. On an emotional level, this makes sense.

But my job is to help a divorcing spouse, or couple, decide if their proposal makes good financial sense. Let's break it down. In our example, Mrs. Jones is a stay-at-home mother with three children; Mr. Jones is the breadwinner, and they have the following assets to divide:

The marital home, which has a Fair Market Value of $225,000, and a remaining balance on the mortgage of $125,000; therefore, the equity in the home = $100,000. The monthly mortgage payment is $1,805 and includes taxes and homeowners insurance. The furniture and jewelry are valued at $8,000. Mr. Jones has a 401K worth $125,000 and they have a joint investment account worth $37,000. Total marital assets = $270,000

If the Jones' agree to a 50/50 asset split, with Mr. Jones keeping his retirement and Mrs. Jones keeping the house, the split, in our example, is as follows:

Mrs. Jones: Equity in the home of $100,000 + $8,000 furniture + $27,000 from the joint investment account = $135,000

Mr. Jones: 401K of $125,000 + $10,000 from the joint investment account = $135,000. $135,000 = $135,000, right? Even Stephen.

Let's take a closer look: Mrs. Jones is going to have a house with a monthly mortgage of $1,805. She will have to pay maintenance and upkeep, and she won't be able to remove her husband's name from the deed and the mortgage because she alone doesn't have the income to support the mortgage. She and her husband will continue to jointly own property after they are divorced! (You can just imagine the implications of that situation!) Wife gets the furniture (valued at $8,000) and $27,000 from the investment account. If she needs cash, for home improvements or a new car, she will have to cash in some or all of the investment account, and in doing so, she will very likely have to pay capital gains tax. She has no retirement assets, and will only be eligible for 50% of her husband's social security, when she is 66.

Mr. Jones has $125,000 in retirement assets and $10,000 from the investment account. He will probably cash in his investments in order to have a down payment for a new home, at which point, he too will probably incur capital gains tax. He will continue to contribute to his retirement account; it will continue to grow and multiply, and he will receive 100% of his social security, when he retires.

As you can see, not all assets are created equal. Mrs. Jones is setting herself up for financial disaster—she will never get a check in the mail from her house, in old age. She has no retirement benefits. If she never remarries, she is entitled to half of her ex-husband's monthly social security benefit. Yes, it's true that she can sell her home in the future, but she will most likely need to use the proceeds from the sale of the house to buy another house—she will always need a place to live.

There are always multiple solutions to equitable distribution, and of course your solution should be what works best for you and your spouse. All strategies and proposals need to take into consideration taxes, asset classifications, income, expenses, age and health of each spouse. Make sure you, your attorney and/or mediator, and your Certified Divorce Financial Analyst (CDFA) work together to make sure your equitable distribution is a good financial decision, not an emotional one!

Janet Bouma is a Certified Divorce Financial Analyst, Regional Director for the Institute for Divorce Financial Analysts, a fully licensed Financial Consultant for over 20 years, and a trained Family Mediator, specializing in the equitable distribution process of divorce. Ms. Bouma is a frequent guest host on "Dealing With Divorce," KQV AM 1410 on your dial, Thursdays at 8PM. She is the managing member of J. Bouma & Associates, LLC, with offices in Avalon and Upper St. Clair. You can reach Janet by phone: 412-307-0040 or by email: JanetBouma@BoumaDivorceSolutions.com to schedule the complementary consultation available to you as a reader of North Hills Monthly Magazine, or to find out the time and location of her next divorce financial seminar.

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