Newly divorced people are typically concerned about their finances: they want to make sure they have enough money to live on now and during retirement. Even very wealthy people have nagging questions and fears that keep them up at night. Once your divorce is final, you may want a break from paperwork, lawyers, or even thinking about your finances. Although that’s a normal reaction, there are a few things you should consider to make sure you’re on the right track financially. I developed this checklist to ensure nothing slips through the cracks post-divorce. Once you’ve completed this list, you should have financial peace of mind.
1. Cancel/suspend joint accounts. If you haven’t already done so, cancel and close all joint accounts you have with your ex-spouse immediately. Joint accounts that remain open are liabilities that could come back to haunt you. The last thing you need is to be on the hook after your ex-spouse runs up charges on credit cards or overdrafts a bank account. If there’s a balance on an account that you can’t pay off immediately (credit-card charges, for example), instruct the bank or credit-card company that you want to suspend the account and not allow any future charges. Confirm that the account cannot be re-opened or unsuspended.
2. Open new accounts. Depending on the situation, it may make sense to apply for new credit cards before you cancel joint accounts. If you have marginal credit and do not have an emergency reserve of cash, getting access to a credit card should be a priority. I’m not one who advocates using credit cards, but I’ve seen what can happen in the short-term if someone does not have sufficient assets to cover their rent, buy food, or pay for healthcare. Sometimes, you need a small bridge loan after a divorce while you get on your feet; a credit card can be that temporary bridge. And it’s not just new credit cards you need to open: you’ll also need to open new bank accounts, investment accounts, etc. Make a list of the accounts you had while married and seek to replace these as soon as possible.
3. Change beneficiaries. I cannot overstate the importance of changing the beneficiaries on your accounts. If you fail to do this, your ex-spouse could end up with your retirement and other assets when you pass away. Changing beneficiary designations is an easy process that can usually be done with a simple form. Most forms will list a primary beneficiary and a contingent beneficiary. If you have a new living trust, ask your estate lawyer who should be listed as primary and contingent beneficiaries on your accounts.
4. Update your personal insurance coverage. Contact your insurance broker and update your automobile, homeowner’s, and umbrella liability coverage. Pay particular attention to the list of assets you scheduled on your homeowner’s policy: it may list jewelry, collectibles, artwork, and other valuables your spouse received in the divorce settlement. There is no sense in paying insurance premiums for assets you do not own. For asset protection purposes, make sure you have an umbrella liability policy on yourself. This is cheap asset protection and a must-have.
5. Create an emergency reserve. After your divorce, it’s more important than ever to have a cash safety net. Set aside six months of living expenses in cash in a bank account – or, because interest rates are so low, consider putting the money in an ultra-short-term bond fund to get a 2% to 3% yield on your money.
6. Create an income safety net. One of the most common fears I hear from both men and women after a divorce is that they feel financially vulnerable – that they don’t have anyone to turn to if they get laid off or suffer a financial setback. One solution is to consider getting a disability and/or critical-illness insurance policy on yourself. These policies provide you with a monthly “paycheck” if you become injured or ill and cannot work, providing peace of mind that your financial life will not be ruined if you suffer from a long-term disability or illness.
7. Check your credit score. During and after a divorce, you should check your credit score. You can receive a free credit report at www.usa.gov/topics/money/credit/credit-reports/bureaus-scoring.shtml (USA) or www.equifax.com/ecm/canada/EFXCreditReportRequestForm.pdf (Canada). If you see errors or other issues on the credit report, contact the bureau immediately and get these discrepancies resolved; errors can impact your credit and cause you to pay more for loans and insurance, and they can even make it difficult for you to get a new job or rent a new home.
8. Create a new estate plan. There’s no better time to think about your estate plan than after a big life event like divorce. If you have children, you may need to update your will – but even if you don’t have children, there are many estate-planning issues to consider. Update or create a power of attorney for healthcare and finances, a living will, and other documents. If you had a living trust, work with your estate lawyer to create a new trust.
9. Retitle assets in your name. Post-divorce, there may be many assets that need to be retitled. For example, if you owned your house in a trust with your spouse, you should retitle the house in your name personally or in the name of a new living trust you create.
10. Run new tax projections. Immediately after a divorce, work with your accountant and do a new tax projection based on your income and deductions. Based on your new tax liability, you may need to change your withholding, pay more or less estimated taxes, and change your investments. For example, if you were in a high tax bracket with your spouse and owned tax-free municipals, after your divorce your taxes may be low enough that you’d do better financially by selling the municipals and investing in taxable bonds. Run the analysis to make sure.
11. Analyze your investments. If your spouse did the investing, you may now own things that you aren’t familiar with or that are not right for you. Do a thorough analysis of each investment to see if it is prudent and makes sense for your risk tolerance and goals. Work with an independent investment advisor to help you create a new asset allocation that’s appropriate for you, to analyze the tax consequences to sell, and to look for replacement investments.
12. Create a new financial plan. Analyze your financial situation post-divorce so you know how much you should be saving for retirement, what your budget should look like, and how to make the most of your new financial situation.
13. Create a new budget. If you cannot afford a full-fledged financial plan, create your own budget. List your income sources (e.g., work, spousal support, child support, investments) and list your new expenses. Track what is coming and going so you can see how much you have to save and invest and how much you have to spend on non-essentials.
14. Set up a new filing system. Since you’ll have all new accounts, policies, and documents, there is no better time to create a new filing system. The time you spend designing the system in the beginning will pay off by helping you locate things quicker and by giving you the data and documents you need to make the best financial decisions.
15. Consider using an online budgeting and tracking system. If you want to be able to see where you stand financially at any time, considering using a website such as Mint.com to track your expenses, income, assets, and liabilities in real time. The financial insecurity many newly-divorced people feel can be lessened or eliminated by having access to their financial world at a moment’s notice.
16. Hire a new financial team. If you don’t have a relationship with an accountant, financial advisor, estate lawyer, insurance broker, etc., then you’ll need to create your own team. Some of the professionals who assisted you during your divorce may be able to continue helping you post-divorce; others may be prohibited from doing so by their professional organizations. Ask your CDFA or family lawyer for referrals, and use AdvisorFit.com to help you evaluate financial advisors you find.
17. Update your Social Security/Social Insurance card. If you change your name after a divorce, you must update your information with the government. Americans should contact the Social Security Administration: https://faq.ssa.gov/ics/support/KBAnswer.asp?questionID=3749&hitOffset=24&docID=12828. Canadians should contact Service Canada: www.ServiceCanada.gc.ca/eng/sin/apply/how.shtml.
18. Check your safe deposit box. You’d be surprised how often divorcing couples forget about their safe deposit box at their bank. Remove the contents (if any) from your old safe deposit box and then close the account. If some of the contents belong to your ex-spouse, then you should leave those items and tell your ex that he/she is now solely responsible for the box. Inform the bank that you wish to have your name (and financial responsibility) removed from the old box, and consider getting a new one, if necessary.
19. Buy a new shredder. Identity theft is all too common and it can cost you thousands of dollars to resolve in addition to countless hours. Buy a good cross-cut shredder so you can destroy old credit cards, credit-card offers, and other items you don’t want to fall into the wrong hands.
20. Strip your computer of valuable information. If you shared a computer with your ex-spouse but are not taking it with you, use a program such as Eraser or Permanent Eraser (for Mac) to destroy personal files and be sure to delete personal information from Internet browsers.
Whew! It’s a long list, but just tackle one at a time until you’ve addressed each of them. Completing this post-divorce checklist will put you on the right track financially – and you can rest assured you’ve done everything possible to take control and make the most of your finances.
Robert Pagliarini, CDFA