If you're a romantic, you may not like what you're about to read.
Statistically, half of all marriages in the U.S. end in divorce. The number jumps to over 60% for second marriages. Samuel Johnson famously quipped that a person who remarries represents 'the triumph of hope over experience.'
Such daunting statistics suggest you should prepare your finances and portfolio for the better-than-even chance that you won't be growing old with your current spouse.
Here's a guide to successfully guarding your money through the rocky shoals of divorce.
1. Remember The Importance Of Cash Flow
Despite all the gains made during the last 50 years, women remain particularly vulnerable to divorce. Women and men have yet to achieve true wage parity, and generally speaking, the adverse financial effects of divorce are much more acute for a wife and mother than a husband and father.
According to the National Center for Health Statistics, a woman's standard of living after a divorce decreases while that of her newly single ex-husband grows. Yup, you read it right. Men enjoy greater earning power and mobility in society, especially in cases where the ex-wife gets the children.
In most divorce settlements, mothers are awarded custody of the kids, along with child support and/or alimony. But at this point, most women make an all-too-common mistake.
In too many cases, the wife/mother accepts child support and/or alimony as her only source of income. And when it comes time to divide the assets, the mother will often agree to take the largest marital asset -- the house -- in exchange for relinquishing her claim on pensions, 401(k)s or other retirement accounts.
In these cases, a mother is left with exactly what she doesn't need (a fairly illiquid asset) and none of what she does need (cash flow). To support herself, she may need to go back to work (and pay for childcare expenses on her own) or stretch every dollar she receives from her ex. Neither scenario leaves many options for retirement savings.
Many divorced women are forced to eventually sell the home they were awarded in the divorce, triggering capital gains taxes. If she was never able to make up for the income she lost in the divorce, the house sale proceeds will continue to go toward monthly bills instead of savings. It's easy to see how divorce can push women into poverty.
2. Protect Your Credit
Of course, husbands can be financially devastated by divorce, too. It's common for both spouses to take some lumps on their credit scores while fighting over who will pay what.
To protect your credit, close all jointly held credit lines as soon as it becomes obvious that divorce is imminent. That doesn't necessarily protect you from being financially responsible for debts incurred by your spouse before the divorce is finalized, but it will at least keep those debts off your FICO score.
Request a copy of your credit history right off the bat so you can see what debts are in your name and which are in your spouses. This is especially useful if one of you brought significant debt into the marriage -- for example, student loans.
Late payments made by your soon-to-be-ex on jointly held installment loans can wreck your credit rating, even if you're blameless. Make doubly certain that credit is henceforth reported in your name. And you may want to assume responsibility for paying any debts in your name, just to make sure they get paid.
3. Revisit All Your Insurance Policies
It's likely that any life insurance policies you purchased while married list your spouse as your main beneficiary. Unless the divorce is extremely amicable, you may want to revisit those beneficiary designations. This applies not only to insurance but to all of your assets—brokerage accounts, mutual funds, IRA accounts, 401(k)s and any other retirement savings.
If you are reliant on child support and alimony, consider asking for your spouse to fund a life insurance policy to protect you from the loss of income you'd experience if he or she were to die unexpectedly. This can be written into a divorce settlement with minimal hassle. You may also want to insist that your ex-spouse take out long-term disability insurance for the same reason.
4. Don't Cede Retirement Assets
Most people going through divorce fail to consider the long term. Do not lose sight of the fact that most of your life will be lived post-divorce, and retirement savings get more and more valuable as you near retirement age.
If your husband or wife holds a defined pension plan and/or other retirement assets such as 401(k)s or IRAs, insist on a piece of the pie. Depending on which state you live in, you may be entitled to benefits incurred by your spouse while you were married.
The Investing Answer: The key in all of this is to focus on your financial future and control your emotions. If you're unlucky enough to find yourself embroiled in divorce proceedings, keep a dispassionate eye on your long-term financial outlook and know you took the appropriate steps to protect yourself.
