The Financial Challenges of Divorce and Widowhood

As if the profound emotional strain and upheaval from divorce or the death of a spouse weren’t enough, many newly independent women also find themselves in the unfamiliar and often uncomfortable position of having to deal with the financial challenges that accompany these situations.

“They may struggle to figure out what the ‘new normal’ is for them financially, especially if they haven’t been that involved in their finances before,” observes Terri R. Munro, a certified financial planner at BT Wealth Management in Atlanta, Ga.

Recently divorced or widowed women walk a fine line when it comes to their newfound financial responsibilities. On one hand, in an attempt to keep emotions from clouding sound decision-making, it often makes sense to table certain decisions until the person feels more settled. On the other hand, certain issues may require prompt attention. What’s more, immersing oneself in financial issues following divorce or the loss of a spouse can be a welcome diversion.

“Many women I work with are excited to learn more about this stuff,” notes Munro. “The point is for them to feel like an educated consumer, so they feel confident and empowered in their decision-making.”

Here are some of the financial issues a newly widowed or divorced woman is likely to encounter in coming to grips with “the new normal,” with suggestions from the personal finance experts at the Financial Planning Association to help address them.

Check out the great financial tips below:

(1) Turn to a trusted financial professional for guidance and support. Unwinding the complex financial issues that often accompany divorce or the death of a spouse can be especially daunting for a person under emotional duress. That’s why it’s vital to have an advisor to lean on for guidance and support that may extend beyond just financial matters. “It’s incredibly important for a woman to have someone who they can trust to put their [client’s] interests first, above their own, because it’s such a vulnerable time,” Munro explains. “A great advisor is there to support you technically and emotionally as well during times likes these.”

Visit the Financial Planning Association’s national database at www.PlannerSearch.org to find a Certified Financial Planner™ (CFP®) in your area.

A trusted advisor can help with immediate responsibilities such as (2) trafficking life insurance forms, handling final (funeral) expenses and the like when the situation involves the death of a spouse. What’s more, the advisor can serve as the quarterback of the advisory team that a newly independent woman is likely to need to address the myriad estate, retirement, tax, insurance and investment issues that arise in the wake of divorce or the death of a spouse. Depending on the situation, such a team might include a CFP, trust/estate attorney, insurance agent(s), accountant and others.

One of the first steps for a woman who finds herself in such a situation is to (3) get a complete picture of her financial situation — the entire balance sheet and portfolio of what the person owns, what she owes and more. “It’s super important to get an inventory of everything, a comprehensive view of assets and liabilities,” Munro says. That should include assets coming to the woman as a result of a divorce settlement as well as any life insurance benefits passed on as a result of the death of a spouse.

In that context, another top priority is to (4) assess the investment portfolio, including assets in retirement accounts (qualified and non-qualified), brokerage accounts, cash accounts and elsewhere (including real estate, etc.) and determine an asset allocation strategy going forward, with guidance from a financial planner. Divorce or the death of a spouse can dictate a major change in one’s financial portfolio, outlook and priorities. A financial professional can help tailor an asset-allocation strategy to meet these new realities.

(5) Getting a handle on cash flow and spending also ranks high on the to-do list. Spend a few months tracking household income and outflows/expenses to get a clear picture of your day-to-day finances under the “new normal.” Then use that information to (6) develop a spending plan, another crucial step in the process. One of the fundamental questions a woman may face in the wake of a divorce or spouse’s death is what to do about work. To continue working or retire? To return to work? A clear picture of cash flow needs going forward will help inform that decision. Creating your budget is a tough, but vitally important step to achieving financial stability. See our article: Creating Your First Budget

That spending plan and investment strategy should be part and parcel of a broader (7) financial plan or retirement plan — a formal document or set of documents drafted by a financial professional (with your input) that serves as a financial roadmap for the future. If such a plan was already in place prior to the divorce or spouse’s death, now is the time to revisit it and revise it as necessary. If no prior plan existed, this is the time to put one in place.

Changing circumstances mean changing insurance needs. To define those needs in the “new normal,” (8) turn to an insurance expert for an insurance needs analysis/assessment. Such an assessment should produce recommendations for life insurance, health insurance, property and casualty insurance and perhaps other forms of insurance (such as disability) in light of your new financial and life circumstances.

“Taxes also are a huge consideration” for newly independent woman, says Munro, given the likelihood of changes in household income, tax filing status and estate planning goals following divorce or the loss of a spouse. It is therefore vital to (9) talk tax and estate planning issues with a trusted financial professional, someone who can help position assets and handle finances for maximum tax efficiency, taking into account some of the considerations unique to newly divorced or widowed women, such as the fact that alimony (spousal support/maintenance) payments from a divorce generally are taxable as income, while child support payments from a divorce are not.

The complexity of Social Security rules that apply to situations involving divorce or the death of a spouse — and the potential financial ramifications of decisions about how to handle Social Security benefits — are enough to warrant (10) a discussion with a financial professional about strategies to maximize those benefits.

Chances are a host of (11) legal documents will also need to be updated in the wake of a divorce or the death of a spouse. An attorney can assist with the retitling of assets (such as a home and other real estate holdings) in your name, the revising of estate documents such as will, power of attorney, medical power of attorney, guardianship of a minor, and the like, and the updating of beneficiary designations associated with life insurance policies, retirement accounts and other holdings.