It’s over. The process is complete. You are now divorced. What do you do next? Outside of the potential celebration, it is time to get to work. You have to make up for lost time and recoup lost money. To do this you need a plan. Unfortunately, depending on your background, mapping out a plan for your finances may not be your strength. This may require reaching out for help, but who do you turn to? In this article we will outline different resources and people who can assist you with rebuilding your financial future.
Mapping Out The Future
If you have been alive long enough to accumulate a net worth in excess of $250,000, then potentially see half of it leave in your divorce, you are not like your peers. Barring a stock market crash, few events impact your portfolio as dramatically as a divorce. Recovering financially from a divorce can be a huge undertaking. Depending on your available resources, cash flow constraints, and time frame left to achieve your goals, planning for your future may seem daunting. This is where patience, understanding, and the right tools can help you map out the steps you need to take in order to reach your goals. The following are the tools you need to utilize in order to begin planning for the future.
- Cash Flow Statement – a very detailed budget. This document lays out your gross and net income along with an itemized outline of your expenses. Upon completion, you can analyze how much money is going toward specific expenses and priorities. This allows you to reprioritize, when necessary, your spending habits.
- Balance Sheet – a comparison of assets and liabilities. If you have ever taken inventory of what you own and how much you owe, then you are more than half way done. This tool lays out what resources can be used to help reach your financial goals. In some cases this analysis helps people understand they own too much “stuff”. In situations where there is too much “stuff” the need to spend money on replacing items become less important, thereby freeing up cash flow. Additionally, if certain assets have not been used within the last 12-24 months then some thought should be given to liquidating them to generate cash.
- Goal Statement – a detailed list of major future desires and associated expenses. As intuitive as this may seem, it will be one of the most difficult tasks to complete. Many people cannot think beyond a couple of months, let alone a couple of years. It will be extremely important to map out as many goals as you can think of, in as much detail as possible. Doing this will provide you with the best opportunity to assess which resources and available cash flow can be allocated towards reaching these goals.
After these three documents have been created, you can generate scenarios to evaluate the likelihood of reaching your short, intermediate, and long term goals.
Traditional Financial Planning
If you have read any of our other blog posts, then you know we take financial planning very seriously, AND believe not all financial plans are created equal. However, for anyone who has not read another post, let me summarize our thoughts into one sentence:
“Financial planning is more than just retirement planning or investment management.”
Any advisor who tries to convince you that building a retirement plan or rebalancing your investment portfolio classifies as true financial planning is providing a disservice. Financial planning, in its most basic form, is planning for a goal and assessing the risks that might negate reaching that goal over a specified period of time. That means assessing aspects of your life that affect this goal. A financial planner will forecast if you are currently saving enough, putting your savings into the correct accounts, and investing within your stated risk profile.
This simplified example outlines the process that should be applied to other areas of your financial life. Unfortunately, this simplistic approach has some drawbacks. First, life cannot be viewed through a singular lens. Too often people have competing goals and objectives that need to be considered when mapping out their financial future. Second, financial success cannot be defined solely by an investment strategy and corresponding performance. We believe success is defined by a lot of planning, hard work, and proper financial management. For example, a well balanced budget can have a significant impact on future outcomes. Lastly, a myopic focus leads to missed opportunities. Planning for a short term goal can inadvertently lead to missed long term savings opportunities. The way interest compounds over a longer period of time can allow you to set aside a smaller amount of money from your monthly cash flow and still meet your goal.
Retirement planning, investment management, and an insurance analysis can individually be marketed as ‘financial planning’. In their own right, each offers a suitable outcome, but the integration of all three can lead to a more comprehensive conclusion. This is an example of comprehensive financial planning. When an advisor specializes in comprehensive financial planning, they simultaneously assess the impact of many variables on a single goal as well as on all goals. This allows the client to prioritize which goals receive the most urgent attention so cash flow and resources can be directed to those goals first. Advisors specializing in comprehensive financial planning are typically CERTIFIED FINANCIAL PLANNER practitioners.
Divorce Financial Planning
We have previously attempted to outline the resources needed to self-assess your own financial well being, and discussed the process of financial planning. Now we turn our attention to ‘Divorce Financial Planning’ and how it differs from comprehensive financial planning. To do this we need to outline some of the nuances associated with divorce that may not exist in traditional financial planning.
- What is included in Divorce Financial Planning:
- Divorce settlement analysis
- Alimony Recapture projections
- Life insurance calculations for alimony protection
- Child Support projections
- Tax planning
- Education savings (for those with children)
- Cash flow planning
- Multiple goal risk assessments
- Disability scenario forecasting
- Special needs support planning for parents and child advocates
- Retirement planning
The aforementioned list provides some insight into the additional planning requirements when working with a recent divorcee. While there are some planning elements that overlap with traditional financial planning, those elements need to be viewed from the perspective of “starting over”. For example, completing a retirement analysis for a divorcee needs to reflect potential irregular cash flow from alimony and child support. Additionally, the analysis should project how much money needs to be saved over a shorter window of time, along with the required rate of return needed to reach the goal. This assessment can then help to outline an appropriate risk level.
There are plenty of advisors out there who can state they work with divorced clients. However, before employing their services you should inquire if they practice ‘Divorce Financial Planning’ or financial planning for people who have been divorced. The former showcases they work with divorcing or recently divorced individuals, while the latter highlights working with someone who may have been divorced at one point in their lives. Depending on how far removed from a divorce someone is, they may or may not have some of the same concerns noted above. In this case the question of planning should include whether the advisor conducts financial planning or comprehensive financial planning? The type of analysis you receive will depend on the answer.
Traditional financial planning has become synonymous with subsets of comprehensive financial planning. While fine on their own, a case can always be made for looking at the whole picture rather than singular pieces. Divorce financial planning, however, is predicated off of a recent life event and is designed to help assess the impact of needing to rebuild your financial house at a critical juncture. After a few years have passed and financial support to your family ends, thentraditional financial planning may be more appropriate. In the end, you will want to work with someone who understands all aspects of your current and future planning needs.
The material was created for educational and informational purposes only and is not intended to provide specific recommendations, tax, or legal advice.
To be considered for the Certified Divorce Financial Analyst (CDFA®) designation, a professional must have at least two years’ experience in the financial or legal industry and must complete a series of four examinations based upon material learned from four self- study courses. Coursework outlines several key areas important in divorce proceedings, including the treatment of property during divorce, alimony and child support, and tax implications of property division. The entire program generally takes at least 4 months to complete.