The U.S. divorce rate tends to get a lot of negative press, but surprisingly, a positive trend has emerged in recent years. In November 2016, Bowling Green State University’s National Center for Family and Marriage Research in Ohio announced that the divorce rate has decreased by 25% since 1980, hitting its lowest point in 35 years.
While that’s encouraging, it doesn't take away the havoc splitting up often wreaks havoc on the finances of couples who do take that step. The damage is compounded when partners make certain mistakes along the way.
Knowing which pitfalls to avoid can make navigating the divorce process as financially smooth as possible. Reading the mistakes both sides tend to make can help. (See also 7 Financial Mistakes You Might Make During Divorce.)
What Men Get Wrong During Divorce
A frequently cited Ohio State University study found that, post-divorce, men retain 2.5 times as much wealth as women, but that doesn’t mean that they’re coming out miles ahead. When it comes to the division of retirement assets, real property and credit, men tend to put themselves at a disadvantage in the following ways.
1. Giving up the family home while remaining on the mortgage
When there are children involved, the most obvious solution for some men is to allow their former spouse to retain ownership of the family home. This can create problems, however, if the man leaves his name on the mortgage.
If the former spouse isn’t able to keep up with the mortgage payments, homeowners insurance, or property taxes, there’s the risk that the home could fall into foreclosure. If the ex-husband's name is on the mortgage, that could cause his FICO score to drop by as much as 160 points, making it much more difficult to qualify for new credit. (See: Getting a Mortgage After Bankruptcy and Foreclosure.)
2. Keeping joint credit cards open
Another potential snag involves joint credit cards. If a husband opened a credit card with his spouse, closing those accounts down after a divorce should be a priority. As long as both names remain on the account, the ex-spouses are equally responsible for any balance owed on the card, even the one who didn’t make the charges. Closing down credit card accounts can temporarily ding the husband's credit score, but it could save him some headaches if his former spouse runs up the balance and defaults on the payments.
3. Handing over retirement assets
If one partner contributed to a 401(k) or another qualified retirement plan during the course of the marriage, he or she may be faced with dividing up those assets once the couple divorces. Retirement accounts aren’t split automatically; the other spouse must first file a Qualified Domestic Relations Order (QDRO) to lay claim to a portion of what the first spouse saved.
A spouse who has accumulated a substantial amount of assets has a few different options for handling a 401(k) in divorce. First, he (or she) could offer the soon-to-be ex-spouse something of equivalent value, such as a vacation home, that would allow the plan's owner to hold on to all of the assets in the plan.
If that’s not an option, the spouse may be looking at splitting up the balance. Whether he does this on a 50-50 basis or comes up with a different percentage ultimately depends on what other assets are on the table and what, if anything, his spouse may have tucked away in a retirement plan of her own. (Read: Divorcing? The Right Way to Split Retirement Plans.)
Where Women Go Astray
Statistically, divorce puts women at a significant disadvantage financially, especially later in life (see Divorce Later in Life Hurts Women's Retirement Prospects). Data from the Government Accountability Office (GAO) shows that 18% of divorced women age 65 or older live in poverty, compared to 11% of men. For some women, these missteps may be at the heart of their money woes.
1. Underestimating household expenses
Retaining ownership of the family home may allow for some stability in a woman's daily routine if she has children, but she has to carefully consider the cost. If her spouse was the one to handle the bills before, she may not realize just how much utilities are each month or what the property taxes cost. Reviewing these expenses before she agrees to keep the house can help her determine whether it’s the most affordable decision, based on what she expects her income to be going forward. (See: Divorce and Mortgage Payments: What You Need to Know.)
2. Banking on spousal or child support
Alimony and child support can make the financial transition after a divorce easier, but it’s a mistake to assume those payments will always come through on time. If the former spouse misses a payment, she could be left in the lurch if her income isn’t enough to cover the bills. An emergency fund can help her out in the short-term, but she needs to have a more permanent back-up plan in place.
Increasing her income and reducing expenses are important steps. Another is to ensure that both ex-spouses have appropriate life insurance and disability coverage. If something were to happen to either one, a disability or life insurance policy can allow the other to continue supporting their children.
3. Overlooking the tax implications
If a woman be on the receiving end of part of your spouse’s retirement plan or assets held in a taxable investment account, she needs to know how that’s going to affect her tax bill. Pulling money out of a 401(k) prior to age 59½, for example, triggers a 10% early withdrawal penalty.
With taxable accounts, she may be looking at paying capital gains tax on investments. If she's receiving alimony, she's also responsible for paying taxes on that income.Not looking at the bigger picture could result in a nasty surprise at tax time.
The Bottom Line
Getting divorced is a drain on your emotions and it can also be a drain on your wallet if you’re not careful.Knowing what can cause your net worth to go down after a divorce is important if you want your financial outlook to remain healthy. Read over all these mistakes and try to steer clear of them. Joining forces with a qualified divorce attorney and a trusted financial advisor can help each spouse make the right decisions when it's time to divvy up their shared assets.