Whether you’re in the process of getting a Divorce or still just thinking about it, you understand the toll that it will take on you and your family. Divorcing couples are faced with the stark reality that they will be starting a new life as a single person, often a single parent, and on a single income. As couples divide their lives, property and parental responsibilities, they are relieved to be ending what is generally a troublesome relationship, but that ending can leave them with significantly fewer assets and retirement savings.
Most of the articles about Divorce are endless discussions of the negative effects on budgets and families. But here’s a look at seven financial benefits that could help make a sad situation a little brighter.
1. Easier budgeting and more control over money
The end of a marriage can mean the end of fights over money. If one spouse is a carefree spendthrift and the other is thrifty, the relationship will inevitably run into serious conflicts. The expenses you and your partner prioritize and the way you spend money are fundamental to a relationship. If this is one of the issues that has driven a wedge between you and your spouse, and ultimately caused your Divorce, you are looking forward to freedom from having to plead with your spouse to rein in spending.
Nancy Hetrick, a senior financial advisor with Better Money Decisions in Phoenix is an example. In the six months after her Divorce to a spendthrift husband, she accumulated $20,000 in savings, while her ex racked up tens of thousands in debt over the same period. This is a dramatic example of different priorities about how to spend money. In this case, it drove a couple to Divorce.
2. Early access to a retirement fund, penalty-free
A Divorce is one of the few times a person can pull money out of a retirement account early and not be slapped with an early withdrawal penalty. If a Qualified Domestic Relations Order is reached as part of a Divorce, it allows for an early withdrawal from the account. This money is exempt from the typical 10% penalty assessed to those younger than age 59 ½. Note that income tax still needs to be paid if the money is not rolled into an IRA.
Cashing out part of a retirement account can be a risky move, and should only be considered after receiving sound financial and tax advice, but it gives the newly divorced some much-needed cash-flow flow at a difficult time when money may be tight.
3. Potentially better investment returns
Divorce could mean better investment returns, at least for women. Men usually take a more aggressive approach to investments and take more risks. After a Divorce, women have the opportunity to take over their own retirement planning, which ultimately can be advantageous.
4. More college financial aid for the kids
Divorce can be hardest on children, but there is one place where they come out ahead–college financial aid. The Free Application for Federal Student Aid (FAFSA) only requires financial information from the custodial parent rather than both parents. However, child support and alimony received from the noncustodial parent must be included on the FAFSA application. Additional financial aid is a little-known benefit of Divorce, but one that can be significant.
5. Social Security perks for older divorcees
Divorced spouses may be eligible to file for Social Security spousal benefits at retirement. If you were married to your spouse for at least ten years, you’re entitled to these benefits. This is something the ex-spouse doesn’t know you’re doing, and it has no impact on the benefits the ex-spouse receives.
If you were 62 by Jan. 1, 2016, you can file a restricted application for Social Security spousal benefits once you hit full retirement age. No longer allowed for younger workers, this application will allow you to receive half of your spouse’s benefit, while you defer your own and let it grow until age 70. For married couples, this only works if a person’s spouse has already started his/her benefit. For divorced couples, you don’t have to wait until your ex-spouse turns on Social Security.
6. Opportunity to reset financial priorities
Many divorced couples end up resenting the lifestyle changes necessitated by their Divorces. Divorce often means selling the family home; membership in the country club may no longer be affordable. Moving to a more modest neighborhood or apartment may be unsettling. Financial experts point out that a Divorce gives people the opportunity to rethink their priorities. It well may be that giving up a family home is a good thing—families are often significantly overextended with huge mortgages, spending more than they can afford, constantly challenged to keep up with their neighbors. Downsizing and living an affordable lifestyle can be a relief.
7. A better bottom line
Divorce doesn’t have to mean a depleted bank account. Even on a lower income, divorced people can build wealth by making smart use of their resources. Not everyone’s financial situation will improve with Divorce, but some people are surprised to learn that it does.
Getting a Divorce isn’t something to rush into, but if you find yourself in the midst of a crumbling marriage, don’t despair. You can still come out ahead. While it is always disruptive and emotionally draining, many couples enjoy new lives that are free of constant tension and bickering.
Are you contemplating Divorce?
If it’s uncontested, we can help you. Our dedicated team is helpful, compassionate and affordable. Contact California Document Preparers at one of our three Bay Area offices today to schedule an appointment.
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