Many marriages do, in fact, last for decades—contrary to popular misconception, the divorce rate in the U.S. has been dropping steadily for decades, and the old saw about half of all marriages ending in divorce is hogwash—although for people over 50, the divorce rate has actually doubled over the years. And that’s important because older folks tend to have more money after decades of working and saving and home ownership—and that means they have a lot more to lose.
In addition to the effects on your mental and emotional wellbeing, divorce can also be what scientists call financially disastrous. How financially disastrous? In some cases, standards of living can drop by double-digit percentage points, and there’s a non-zero chance of living in poverty as the result of a divorce. If your marriage is getting rocky and you’re starting to wonder if it’s going to end in a courtroom, now’s the time to start thinking about the financial implications of divorce—because there are a lot of them.
The direct costs of divorce
The first thing to consider when contemplating divorce is the literal cost of it. This depends almost entirely on how combative it is. An amicable divorce, where both parties sit down and work out how to split everything up, can be as cheap as $200, or cost a few grand if you get some professional advice but keep things friendly.
But if you can’t agree on anything and need to engage lawyers, your costs rise—dramatically. The average cost of a contested divorce ranges from $15,000 to $20,000. This can get even more expensive if you have significant assets or if there are other issues that complicate your split. So the first thing you need to do if you’re considering divorcing your spouse is to make sure you can afford those bills.
Aside from attorney costs, there may also be a long list of additional fees to cover in a divorce, including:
Accountants or financial planners Real estate professionals Mediators Therapists (for you and any children involved) MoversThe soft costs of a divorce
In addition to the stuff that comes with an invoice and a hard number that needs to be paid, divorce can generate a number of less-well-defined costs. For example, it’s easy to get into a “fire sale” mentality when it comes to assets, because you want to split them as quickly as possible. As a result, you might sell a shared property for less than its actual market value because of the emotional drive to get the whole process over with.
There’s also the question of assets that don’t have a fixed value. For example, let’s say there’s a house owned by both spouses that’s valued at $250,000, and there’s a joint IRA or other account with a current value of $250,000. Having each spouse take one of those assets might seem equitable in the moment, but there’s no way to predict what those assets will be worth in, say, 10 years. If the housing market in your area goes soft but the stock market soars, someone’s going to regret that bargain.
But splitting those assets comes with its own headaches.
Taxes
Something many people don’t anticipate during a divorce is the tax implications. These range from the mundane—you’ll need to consult a professional for advice on what your new filing status should be (single versus head of household), and if you’re employed you might need to examine your withholdings and get clarity on your new tax bracket. And keep in mind that if you’re receiving spousal support (aka alimony), that’s considered taxable income. If you’re paying support, that’s tax deductible.
If you decide to split retirement accounts, that can get hairy. For 401(k) plans, just cutting a check can result in a tax bill the size of Jupiter, so you’re better off obtaining a Qualified Domestic Relations Order (QDRO) in order to transfer the money without being killed by taxes. You don’t need to get a QDRO to split an IRA, but you do need to be careful how your transfer the funds—again, you can’t just cut a check unless you enjoy paying taxes and penalties.
Lifestyle
Divorce changes your whole financial scene. If you weren’t working as a spouse, your income can suddenly drop precipitously, even if you obtained an order of spousal support. You’ll need to determine quickly whether you’ll be able to survive on your new income, or if you’ll need to develop other income sources.
Even if your income is equal to your former partner’s, you’re still looking at a shock, because you’ll be supporting 100% of the lifestyle on 50% of the income. More accurately, you might be supporting 110% of the lifestyle (or more) because you’ll have increased expenses like childcare, health insurance (if you were on your spouse’s insurance previously), and replacing all the stuff that you didn’t take with you in the divorce—imagine having to not just buy a new house, but also furnish it.
Retirement
Divorce is a destroyer of net worth—typically divorce leaves you about 30% poorer than you were while married. And that financial hit can have a negative impact on your future as well as your present: After a divorce, you enjoy a much higher risk of not having enough retirement savings. The combined impact of all those bills and expenses, having to replace assets (like a house) that you used to already have, and a potential drop in income all conspire to make your retirement plans a lot more bleak than they used to be.
All you can do is assess your new situation and make a plan with a financial adviser. If divorce is inevitable, the time to start planning your revised retirement is right now.
Debt
If you had joint accounts with your spouse—especially credit card accounts—you might be responsible for debts they accrue even if you had nothing to do with the spending. There’s a simple rule of thumb: If your name is on the credit agreement, assume you can be held responsible for the entire debt no matter who actually pulled the trigger. That applies to bank loans, mortgages, and auto loans as well. It’s vital to get a clear picture of all the debt accrued during the marriage and to know who’s ultimately responsible for it.
Child support & alimony
Finally, if there are children involved, there may be child support payments to be made, and if there is a significant difference in income levels, there may also be an order of spousal support. The levels of child support vary very much depending on the state you live in, and both child support and spousal support will vary according to other factors, like your income levels post-divorce and how assets are divided. But if you might wind up paying or relying on these payments, you’ll need to consider how they will impact your overall financial situation.
