When you first consider divorce, there are often many financial questions and concerns. A complete resolution will answer many of these questions, but it is important to have a complete understanding of the financial situation before coming up with resolutions. These questions are designed to help you think through the financial issues and build that foundation from which to negotiate.
- What are your assets? This includes all bank and investments accounts, retirement accounts, real estate, debts (including loans, mortgages, credit cards and student loans), vehicles, and personal property.
- What are your liabilities? This includes all personal loans, bank loans, mortgages, credit cards and student loans.
- Do you have a full understanding of your financial situation? This is necessary for negotiations to happen in good faith.
- What are your financial goals? What is most important to you financially moving forward after the divorce.
- What is less important? What part of your financial picture are you willing to give up or do you not care as much about?
- What are you most scared about financially? This can help your team know where to focus their attention to make the resolutions most comforting.
- Do you have an outside financial advisor? It may be helpful to have your outside professionals work with your divorce team to make sure everyone has the same information and you are not receiving conflicting advice.
- What is your earning potential moving forward? Your capacity to earn is likely to be an important piece of the divorce finances so it is good to think about it ahead of time.
- Do you expect changes to your financial situation? For example, are you expecting an inheritance? Do you have any large expenses coming up?
Think about these questions should prepare you to move forward in the process with the foundation to make good decisions. Using collaborative professionals, both legal and financial, can help you reach resolutions that fully address your financial needs. Learn more at www.collaborativelaw.org
In divorce, there are many things to consider with retirement accounts. Here are 5 important facts/questions to keep in mind when dealing with such accounts during a divorce.
- Tax Free Division. In Minnesota, retirement accounts that were created during the marriage are typically treated as marital property and they can be divided. A division of a retirement account can often occur tax-free as long as it is an in-kind division and remains in retirement form for both after division.
- Penalties and/or Tax Consequences. If either party chooses to cash out retirement dollars pursuant to a divorce, there may be penalties and/or tax consequences.
- Comparing Retirement Assets to Other Assets. When comparing retirement assets to other assets, such as investment accounts or real estate, taxes need to be considered. Because many retirement accounts are pre-tax and will be taxed in the future, the values are not dollor-for-dollar the same as cash.
- Comparing Value of Retirement Assets. There are different elements to consider when evaluating the value of a retirement account. The amount in the account is only one aspect. Also consider the tax status of the contributions (before or after-tax dollars) and how accessible the funds are before and during retirement.
- Creativity in Retirement Awards. There are ways to divide retirement and cash out the assets to avoid some penalties. For example, a 401k may be divided during a divorce. If the recipient chooses to cash out some or all of the distribution as part of the divorce, they may avoid the 10% early withdrawal penalty, but they will be taxed. Creative resolutions regarding retirement may help parties to meet their goals.
Using a financial neutral during a collaborative divorce can help parties fully understand the financial implications of retirement dollars and come up with unique resolutions.
Being a single parent demands so much of a person’s time and energy that taking care of longer-term financial concerns often take a back seat. So many single parents face financial restrictions that make it seem they are constantly on a financial tightrope. Getting off that tightrope and onto solid financial ground should be a priority for every single parent. Finding solid financial ground starts with determining your financial goals and monthly cash flow.
Determine your financial goals
The first step on the path to a more secure financial future is to determine your financial goals. Your financial goals should include short-term, medium-term and long-term goals. Short-term goals may be to reduce spending and not rely on credit cards to make it to the next paycheck. Medium-term goals could be paying off your credit card(s) and creating an emergency fund. Long-term goals may be saving for your children’s college expenses and retirement.
Figure out your cash flow
All of your financial goals require one thing – saving money. To do so, you need to figure out how much you spend and then create a budget that incorporates saving. Tracking your spending can be pretty easy these days with online account aggregators like Mint.com. To better understand your spending habits when using credit cards, you may need to go old school and save the receipts to review your purchases. This is particularly helpful if much of your shopping happens at Walmart, Target or Costco, where your shopping cart could include groceries, video games and clothes. One way or another, figure out how much of your spending is essential and how much is unnecessary spur of the moment buys. Create a budget that accurately matches your essential spending and replaces most of your unnecessary spending with savings.
Be mindful of not only what you buy, but also how you buy it. Using high interest credit cards are an impediment to meeting your financial goals. Paying off high interest credit cards is a financial goal that improves the odds of meeting your other financial goals.
Save the tax-free way
Tax-deferred investment accounts such as Investment Retirement Accounts (IRAs) for retirement and college-funding accounts, such as 529 accounts, are a good way to meet those long-term goals. These accounts often can be opened with a couple hundred dollars. Setting up automatic monthly contributions from your bank account to these accounts can be done for amounts as low as $25. Both types of accounts grow without being taxed until the money is withdrawn. For 529 accounts, there will be no taxes if the withdrawals are spent on qualifying college expenses.
Figuring out your budget shouldn’t be a chore done after the kids are in bed. It should be a family project. Developing good financial habits that lead to meeting financial goals is an essential skill that all parents should share with their children.
“Mom, why won’t this piece fit here like it should?” My son is trying to build a Lego kit, and has made a mistake in the previous steps while trying to follow the directions. He keeps fitting the pieces together, but isn’t getting any closer to making the design on the cover of the box. I tell him he needs to go back a few steps and figure out where the pieces aren’t put together correctly. He does, and soon he is on his way.
As a collaborative divorce lawyer, working with my clients towards their ideal divorce is similar to building a Lego creation. It is not a collector’s edition kit that is pre-designed. The clients actively design this project themselves.
At the beginning of the process, we sit down and identify what an ideal divorce would look like for their family. This becomes our own design on the box that we aspire to build. To build it, the client brings the crucial information regarding their life, financially and otherwise, that we have to work with. These are the Lego pieces that we must fit together to replicate the design on the box. As a lawyer, I come to the table with knowledge of the instructions, which in this case are the statutes. The statues give us acceptable methods for fitting the Lego pieces together. Working as a team, the client and I look at the pieces we have to work with and build a divorce agreement that both fits their desired outcome and the statutes’ requirements.
Sometimes we run into the same dilemma as my son – what we are making isn’t quite turning out like we wanted. Through years of practice, I know the solution is this: go back a few steps, look again at the building blocks, review the directions, and rearrange the pieces. Before you know it, we have built what we wanted to build.
While we financial advisors need to know a lot about numbers, we often use some shortcut “rules-of-thumb” to make quick estimates. Two of those rules-of-thumb are the Rule of 72 and the Rule of 115.
The rule of 72 is a shorthand way to figure out how long it will take an investment to double in value, if one knows the annual rate of return or interest rate. The equation can also be switched around to figure out the annual rate of return if one knows how long it took for the investment to double.
It is called the rule of 72 because the doubling time is figured out by dividing the rate of return by 72. For example, an investment earning 6% per year will double in 72/6 = 12 years. An investment earning 8% will double in 72/8 = 9 years.
Flipping the equation around to determine the rate of return is done as follows. If an investment doubles in value in 10 years, the annual rate of return is 10/72 = 7.2%.
The rule of 72 is an approximation that is based on annual compounding. The true results will differ slightly. Many investment returns are based on continuous compounding which grows a bit faster than annual compounding. For situations involving continuous compounding, use 69.3 instead of 72.
The Rule of 115 is used to figure out how long it will take for an investment to triple in value. It follows the same process as the Rule of 72. If an investment earns 7% per year, it will take 115/7 = 16.4 years for the investment to triple in value. As with the Rule of 72, the Rule of 115 is an approximation. There are some practitioners that learned this as the Rule of 114. 115 slightly overestimates the time it takes for an investment to triple and 114 slightly underestimates it.
If you have REALY big aspirations… use the Rule of 144 to calculate, your investment will quadruple!