Written By: Kristina George, CPA, CFP, CDFA
Divorce is an extremely turbulent, stressful, and emotional process during which people are tasked with making some of the most important financial decisions of their lives. For better or worse, the reverberations from these financial decisions will impact them for years (if not decades) into the future. So how divorcing spouses approach such an emotionally charged time with a clear head and a rational decision-making process? How do they temporarily put their feelings aside and approach their divorce as a major financial event to set themselves up for a sound financial future? Thinking financially isn’t always easy, especially when divorce is involved. But it is possible with the right help.
What is a CDFA?
The role of the CDFA™ is to help both client and lawyer understand how the financial decisions made today will impact the client’s financial future based on certain assumptions. When people think about getting a divorce, the first professional that comes to mind is an attorney. Typically, a financial advisor – whether it is a CPA, CFP®, or a CDFA™ – is not considered until later in the divorce process – or even until after the divorce is final. But, having a financial planner advise on the impact of major financial decisions from the very beginning (even before the divorce papers are filed) can be invaluable, as we will illustrate in more detail below.
What Insight Do CDFAs Add to the Collaborative Divorce Process?
Financial problems can tear a marriage apart and are often the primary factor that leads to divorce. Once a decision to separate or divorce has been reached, all sorts of questions bubble to the surface. These questions are often clouded by wounded emotions and accompanied by mutual accusations, which comes as no surprise. If a couple couldn’t solve their financial difficulties while the marriage was underway, it is unlikely that they will be able to agree on pressing financial issues when it has fallen apart.
Many divorcing couples have questions such as:
- Where will the children live?
- Who will pay for their education and medical treatment?
- How do we value our property?
- Who gets what property?
- What tax issues must we be concerned with?
- How do we divide retirement funds and pensions?
- How will the lower-earning spouse survive financially?
- What additional financial support does that person need?
- Who gets the house?
- What happens if a paying ex-spouse dies?
While lawyers are great at answering the legal side of these questions, many are less well-versed in the future financial implications of proposed settlements that could include tax issues. As supplementary experts in the collaborative divorce process, CDFA™s can provide solid information and expert analysis that help the clients reach the best possible financial resolutions.
CDFAs Help Clients Receive Equitable Settlements
While the role of the CDFA™ is not limited to this one benefit, one of the most attractive outcomes of working with a CDFA™ is in receiving an equitable divorce settlement. As we see all too often, what looks like a reasonable settlement on the surface often results in an unbalanced financial outcome.
Let’s look at an example:
John and Jane are 40 years old and have two children. They own a home worth $165,000 with a net equity of $77,500. Their retirement savings total $165,500. John earns $90,000 a year and has a take-home pay of $68,760 a year. Jane has never worked outside the home and has no job skills but hopes to get a part-time job with take-home pay of $8,900 a year. The following settlement has been suggested. After the divorce, Jane and the children will live in the matrimonial home, which will be deeded to her. She will also receive $44,000 of the retirement savings while John will receive the remaining $121,500, thus dividing the assets equally. John will pay Jane spousal support of $600 per month for five years and child support of $225 per month per child. He will also pay the children’s college costs, starting in four years. John’s expenses include his normal living expenses, child support, spousal support, and education costs. Jane’s expenses include support for the children and will be reduced as each child leaves home to attend college. At first glance, this appears to be a reasonably fair settlement. However, a detailed analysis creates the financial future illustrated in Figure 1 (below). As you can see, Jane’s assets will be completely depleted within seven years, whereas John’s investments will grow dramatically.
To improve Jane’s financial future, an alternative settlement could provide her with increased spousal support of $1,500 per month for 10 years – which would actually cost John $1,005 per month in after-tax dollars. The correct child support for two children according to the Child Support Guidelines in their area is $1,136 per month for a payor with John’s income. Jane could also be awarded an additional $24,300 from the retirement savings plans, although she might need to cut her expenses by 10%. These changes in the original settlement would produce the results illustrated in Figure 2 (below). If they are made, John will still have a surplus, which he can add to his investments. If John stays within his budget and invests all of his extra income, his investments have the capacity to grow to $2.5 million by the time he is 60.
This example illustrates the value of financial planning as a means of reaching a more equitable divorce settlement. If the court’s intent is to treat both parties in a divorce as equitably as possible, it is essential to analyze the marriage as if it were a financial contract, and a CDFA™ is uniquely suited to do so.
Working with a Certified Divorce Financial Analyst
Even the most financially wise might not be able to calculate the implications of their settlement five, ten, or twenty years down the road. It might not be clear to them whether they should stay in their marital home, sell it, buy, or rent. There are so many questions that arise at this already turbulent time that can make financial decision-making incredibly difficult. Having a CDFA™ on your side can help to ease and expedite the process so you can get to building your newly single life. Remember: in divorce, there are no do-overs, and you could be stuck with the consequences of your decisions for the rest of your life. Instead, let an expert help you keep perspective on what really matters so you can become financially self-reliant. If you’re interested in learning more about how our CDFA™s help couples like you face divorce with confidence, we encourage you to schedule a complimentary conversation with a CDFA™ at our firm. We will be happy to answer your initial questions (of which we are sure there is no shortage) and get you pointed in the right direction.