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How to plan your finances after getting a divorce
Research shows that there were 16.7 divorces per 1,000 married women in 2016 — such circumstances are stressful and can be exacerbated when children are involved: Parents may experience difficult financial and legal issues through the process, even as they contemplate how to minimize the impact on their children.
Katelyn* found herself in that situation upon learning that her husband wanted a divorce. Her first thoughts were to ensure the future security of her then four-year-old daughter in every possible way. Katelyn's ex-husband planned to move to another country after the divorce, which meant for all practical purposes, she would be both mom and dad, full-time.
“I knew the financial and support responsibilities of being a single parent would be enormous,” says Katelyn, a CPA and MBA expert in technical accounting and regulatory policy.
In most respects Katelyn's skilled financial background and the aid of experts like a divorce financial professional helped her safeguard her child and the assets that mattered to their futures. Though she annually funds her 401K to the full extent, she expects to work past retirement age – approaching in about five years – to maintain her lifestyle and support her daughter’s college endeavors. If you, too, unexpectedly become a single parent, there are a few steps you can take to help prepare yourself and your family for the transition:
Reviewing college fund plans
Katelyn and her ex regularly contributed to a 529 plan once their child was born, including a final payment each made as part of concluding the divorce. “Not much has gone into it since,” she says; future payments weren’t included in the divorce agreement. Even if they were, current circumstances likely would prevent additional contributions on her ex's part as he is now unemployed and even monthly child support payments are sporadic.
At this point, she knows she’ll probably pay more towards her daughter’s education than her ex. “The cost of college is very high, and depending on your salary as a professional, your child’s financial aid opportunities may be less,” she says.
Sheri Conklin, principal of Conklin Financial Planning, says that depending on a couple's income and the expenses of going from one to two households, more often than not a divorce will mark the end of college fund contributions – at least for a short while and probably longer for all but the most high-income earners. Even if contributions are stipulated in a divorce agreement, “when funds get tight usually that’s something people can’t afford to do,” she says. She recommends preparing children for other ways to support their education, such as scholarships and jobs. Alternately, “if you can fund a Roth IRA and meet your retirement projections, you can always pull some money from there to help with college” without incurring penalties, Conklin says.
Managing disability insurance
Katelyn is fortunate that her current employer in Manhattan provides very good disability insurance. But others who have existing policies and have recently become single parents may want to look into a “Future Purchase Option” rider, recommends Jason P. Veirs, owner and president of Insurance Experts. This “allows an insured to increase their coverage while not having to medically re-qualify again,” he says. “This is important as a person’s income tends to increase throughout their career, and they can continue to increase their coverage as their liabilities increase.”
Disability insurance can have pitfalls for the self-employed and individuals who work for small companies. They won’t get the benefit of the group rates that large companies can negotiate. But if “you can’t afford to get a policy that covers up to 60% of your salary [the industry standard], maybe look at covering a portion of it,” Conklin advises.
Altering guardianship arrangements
One of Katelyn’s most important divorce agreement requirements was that her daughter remain in the states while a minor. Since it’s not likely that her ex wants to return to live here, Katelyn named her sister, a lawyer in New York, to assume the role of guardian should circumstances warrant.
Updating legal documents to cover this issue is particularly critical if a parent has reason to want to avoid or mitigate the other parent’s say in who becomes the legal guardian upon his or her death. “He or she should create a comprehensive estate plan, including a will, guardian nominations, and even exclusions (a list of folks who should not be named guardian),” says Anthony S. Park of Anthony S. Park, PLLC, a NY law firm of probate attorneys and professional executors.
Aligning life insurance
To protect their child, Katelyn’s divorce agreement specified that each party take out 20-year, $200,000 term insurance policies. Katelyn has further secured her daughter’s future by taking advantage of additional life insurance through her employer.
While divorced partners can serve as each other’s trustee or guardian for a life insurance policy in which the child is the beneficiary, that’s not always the best approach. Katelyn is custodian for her daughter as the beneficiary of her ex’s policy; but Katelyn’s sister serves that function for her policy, where her daughter is also the beneficiary. Conklin says it’s in the best interest of the child to “name someone you know will make sure that the money gets to the kids or goes to help the kids. You want someone who will put their interests first,” she says.
Maintaining good health
Your health and fitness can fall by the wayside when you lose a partner to lean on. Katelyn initially tried to take art, dance and workout classes. But “working in NYC, with age advancing, has been draining my energy,” she says.
It can be difficult to find the time, money and energy to stay in good health as a single parent, but it’s important to make self care part of your parenting strategy. One way to minimize time and cost is to exercise with your child so that it becomes healthy quality time as a family.
For Katelyn, and many single parents, it’s all about persistence. “I know I need to get a healthier lifestyle, and I plan to get back into things.” She wants to provide as much support for her daughter for as long as she can.
“I have every intention of being there for her,” says Katelyn.
Life insurance that rewards you for living a healthy life.