One of the things that I took away from getting divorced and from also seeing friends going through the same experience is that things are better once you come up with a game plan. My advice to anyone going through this dreadful event is to consider the following steps:
- Get a comprehensive financial plan done, including retirement projections. I did this for myself and got a lot of peace knowing that my financial future was still on track. Even if redoing the plan means having to adjust some of your retirement expectations and increasing what you need to put away, I believe that knowing and taking charge of the situation is better than guessing and hoping things will turn out okay. Redoing your financial plan may also need increasing the insurance protection on yourself, particularly disability, long term care and critical illness coverage. As well, if you are receiving spousal support or paying or receiving child support, consider owning life insurance on your soon-to-be-former spouse and making this part of any separation agreement. This coverage can replace any spousal support you rely on or provide the money to care for a child without the financial assistance of the other parent.
- Carefully look at tax considerations when negotiating a Separation Agreement. Although assets can be transferred on a tax-deferred basis between divorcing spouses, someone will have to pay the tax eventually. Accordingly, all assets are not equal! A non-registered investment portfolio is worth a lot more than an RRSP of a similar value. By taking unrealized tax liability and both spouses’ tax brackets into account, it is possible to stretch family assets further and leave both spouses with a bit more than might otherwise be the case. For example, a higher income spouse might pay spousal support monthly rather in a single lump sum. By paying monthly, this spouse can claim a deduction (which doesn’t apply for single lump sum payments) and the other spouse declares the same amount as income. Even after topping up payments to take into account the lower income spouse’s taxes, the higher income spouse is better off than if s/he had paid the taxes personally and then wrote a support cheque. This could mean the paying spouse could afford to pay even more, which leaves both spouses with more after-tax money.
- Don’t underestimate the value of a good pension! People are often shocked to discover what a good pension (especially with inflation indexing) is worth. In B.C., there is a procedure where the divorcing spouse can simply carve out a portion of the other spouse’s work pension and receive a separate pension. If you are the spouse with the pension, this is usually not a good idea at all. One reason why you want to keep your entire pension is that any raises you receive actually would increase both pensions. In other words, your future efforts would increase the value of your spouse’s pension as well as yours. If you are expecting significant raises in the future, this can mean a major windfall for your spouse. If nothing else, when negotiating how to divide a pension, do not neglect to get an actuarial valuation of what the pension is worth, as some people are surprised to learn that their pensions can be worth more than their homes!
- Redo your Will and get a new Power of Attorney. Even though the law treats a divorced spouse as someone who has predeceased you unless your Will says otherwise, there can still be significant problems if you fail to redo your Will. In my case, my estate was to be evenly divided between my family and my wife’s on the last death. While my former in-laws are very good people, I no longer wanted to leave 50% of my estate. If you have children, you might also need to think about who you want to manage their money if you don’t have any confidence in your former spouse’s financial skills. On a related note, be sure to change the beneficiary designations on your life insurance, registered money and pensions. Although your spouse may not inherit under your Will, they may still get to keep any insurance or registered assets unless you act now.
- Be careful about making any big financial decisions within the year after divorce. At a time when your whole life is changing, it is tempting to take major steps towards achieving your new life. While many of these steps may be ideal, do remember that you are going through perhaps the most stressful period of your life and that this usually no reason why you immediately need to buy a new house in a different town or put all of your money into the stock market. As the express goes, “act in haste, repent at leisure.” If it is a good decision now, it will probably be still be a good decision next year as well. Although I felt a sense of urgency to make decisions and take immediate steps, sometimes the best decision is slow down, breath and wait. If nothing else, I suggest getting input on important financial decisions from someone you trust whose advice you respect.
- Cut yourself some financial slack. Getting divorced can be really expensive. Off the top of my head, some of the costs may include moving expenses, furnishing a new place, increased child care, as well as counselling and medical expenses, and child and spousal support. As well, you may also be forced to liquidate assets, such as the family home, for less than you expect or feeling that you gave up too much when dividing assets with your spouse. Rather than beating yourself up over these events, I suggest looking at a divorce like a financial tsunami and give yourself credit for doing the best you can in a time of crisis. Moreover, many of the expenses are short-term costs. You will soon be able to get a sense of your new financial picture and can take steps to put your financial house in order once again.Balance between impulse spending and ‘saving like Scrooge.’ When I got divorced, I has conflicting urges to try to make up for lost time by