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Peter T. Waldron

How do you know? Don’t you owe it to yourself? (4/6)

“I have it all done,” is a statement that I have heard multiple times over the years when I ask people about their long-term financial plan. I respond with, “how do you know?” This month, I will be continuing the six-part series where we explore this dialogue.  I will reiterate that you must have your strategy tested with a real-life scenario to know for certain that you “have it all done.” There are a few major life events that can test your strategy: death, a major health event (disability, stroke, dementia, etc.), retirement, divorce, the sale of a company, and receiving an inheritance. You can plan for the worst, but it is not until a major life event occurs that you can be certain that your plan will be successful. Last month, we discussed the commonly overlooked planning elements in the event of retirement, and this month’s article will focus on the financial impact that a divorce can have.

Let us begin this discussion with alimony and child support. I know it seems obvious but it is vital to note that these expenses are real and will change the direction of any financial plan. It will be the responsibility of the parents to set aside the emotional elements of the divorce and layout a plan for how they will manage the use of the now bifurcated income. Each parent will have up to half as much income, so everything they were used to spending money on will now be significantly reduced. It is common that people assume that splitting the income in half will somehow result in two full incomes, however in all my years, I have never seen the math work out that way.

Looking at the comprehensive elements of financial plan, the first thing that should be considered is the family’s health insurance. For a stay at home parent, divorce can substantially change their health insurance costs and coverages. Another area of the financial landscape that may change will be your housing. There are many different housing scenarios that I’ve seen but the most important thing to consider is that there will be more costs. In most of the cases that I have seen, the couple had to liquidate their current home and substantially downsize to ensure that they were able to afford the cost of supporting two homes.

Next, assets will most likely be cut in half, whether it is a closely held business or investment accounts (qualified and non-qualified). In the case of a business, the company should have a buy-sell agreement in place so that the spouse does not become the new business partner. Capital will also be needed to pay the spouse off for their community property interest in the business (unless this asset was kept separate). In the case of investment accounts, these may need to be split in half, which means that the number of years until retirement will likely increase or the standard of living during retirement will need to be decreased.

Another important thing to consider is life insurance. A non-employed spouse may now be relying on someone else to support their lifestyle. It would prudent to insure the working spouse’s life if they passed away, to ensure that there would not be any financial suffering. It would also be wise to insure the working spouse’s ability to earn an income with disability insurance.       

Lastly, c0nsider that your estate plan is now two estate plans. Both spouses will want to create an independent estate plan document so that each person’s wishes are considered when they pass away. This also will ensure that the assets are distributed accordingly versus having a probate court handle the distribution.  

This article only scratches the surface but the key takeaway from the article is that your financial life will be different after a divorce and working with an advisor or a team of advisors will help you understand the impact of divorce and will help you plan for your future. My next article will explore the financial impact of selling your business.

“It's not gonna be easy. It's going to be really hard; we're gonna have to work at this every day, but I want to do that because I want you. I want all of you, forever, every day. You and me...every day.”  Nicholas Sparks

 

PLEASE CONTACT PETER WALDRON TO SCHEDULE A COMPLIMENTARY REVIEW OF YOUR FINANCIAL SITUATION, 925-786-7686 or peter.waldron@lfg.com

 

Peter T. Waldron: California Insurance License #0E47827

 

Peter T. Waldron is a registered representative of Lincoln Financial Advisors, a broker/dealer, member SIPC, and offers investment advisory service through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor, Spectrum Wealth Partners is not an affiliate of Lincoln Financial Advisors.  3201 Danville Blvd, Suite 190, Alamo, CA 94507.  Insurance offered through Lincoln Marketing and Insurance Agency, LLC and Lincoln Associates Insurance Agency, Inc. and other fine companies. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstance. The content of this material was provided to you by Lincoln Financial Advisors Corp. for its representatives and their clients.   CRN2320654-111618