Caring for Your Finances if You're Suddenly Single
During the transition period after a divorce or death of a spouse, you need to make weighty financial decisions that can affect you—and possibly your children—for the rest of your life.
It can be challenging to make important life decisions during this time while dealing with the many emotions you'll experience. Financial experts typically counsel their clients to wait awhile before figuring out how to manage the longer-term financial transition. But as difficult as it might be, you'll need to settle some time-sensitive matters right away.
Knowing this will be a stressful time for you, focus on addressing only the most urgent financial matters. Then allow yourself the necessary time to heal before diving into your less-pressing financial decisions.
Prioritizing your decision-making
We all have unique circumstances, and each of us will have a different "to-do" list, but here are some important financial necessities to consider first if you find yourself suddenly single.
Update accounts: As soon as your marital status changes because of a death or divorce, contact banks, brokerage firms, and any other financial institutions where you have jointly held accounts and make yourself the account holder. For widows/widowers, you'll need to get several copies of your spouse's death certificate in order to update accounts. Divorcees will need to provide signatures and the appropriate paperwork to financial institutions to change account ownership or take the simpler option recommended by many divorce experts, which is to close joint accounts and opening new ones in your own name. You should also follow up on accounts that may not be in your name but may include you as a beneficiary.
Collect benefits on retirement savings: Retirement accounts, such as 401(k)s, 403(b)s, and Roth and Traditional Individual Retirement Accounts (IRAs), will pass to the surviving spouse if that individual is named as the beneficiary. IRAs typically pass directly to the surviving spouse, even if a beneficiary isn't named, but the transfer of assets could be a long and expensive process if retirement assets need to be settled in probate court. It's best to speak with a tax advisor to understand the tax implications of inherited IRAs before you move any assets. Typically, divorcees have a legal arrangement as part of the divorce settlement that acknowledges the recipient's right to receive a portion of the spouse's retirement account balance. In a court-approved transaction, IRAs are divided through a one-time distribution from one spouse's account to the other's.
Check any life insurance policies: If your spouse had life insurance through an agent or through an employer, you as the surviving spouse should begin to receive tax-free proceeds within one week to six weeks after the death notification is received. Divorcees should consider updating the beneficiary on their life insurance policy, as well as purchasing or changing coverage for themselves and their children.
Update your own beneficiaries: As you update and review your policies and accounts, take the opportunity to ensure your beneficiaries are listed correctly so you can protect your loved ones. If you're divorcing, you also may want to remove your ex-spouse as a beneficiary. Schwab account holders can add or adjust their beneficiary designations online in just a few simple steps.
Update your health insurance policy: If you received health insurance through your spouse, you may continue coverage by paying monthly premiums through the COBRA law. (COBRA generally makes health insurance benefits available at a cost of about 102% of the policy, typically for up to 36 months.) Consider other health insurance plans through an employer or an individual plan that may be more cost effective.
Creating a long-term financial plan
After addressing the most pressing matters, take the time you need to consider your longer-term plans to help protect your financial well-being.
Build a budget: Create an itemized list of your essential day-to-day expenses (bills, groceries, mortgage, etc.), then list any outstanding debt you carry. After totaling your essential expenses and debt obligations, you'll have a clearer picture of what you can spend on discretionary items, such as entertainment, dining, sporting events, and travel. Once you know the financial requirements required to maintain your lifestyle, determine whether your income and savings will cover your expenses. If not, consider ways to cut your spending or reduce loan payments. You may also want to consider saving money by downsizing your home, if it makes sense for you to do so.
Explore Social Security benefits: If your spouse died, you may be eligible for a one-time death benefit from Social Security, as well as 50% of your spouse's Social Security benefit if it's higher than yours. Benefits may be taken at your full retirement age, or you can elect to receive reduced benefits earlier. Divorced spouses may be eligible to receive Social Security benefits if they were married longer than 10 years and are at least 62 years old.
Protect yourself for the future: Consider long-term care insurance to defray the high costs of a nursing home stay or at-home assisted living that could drain your income. If you're employed, disability insurance can help provide some income if you become injured or ill. Despite the emotional strain you may experience from a divorce or the death of a spouse, you can take steps to ensure your financial well-being as a newly single person.
Changing your finances to match your new, legally single status can be complicated, but it's important to take all the necessary steps to ensure your paperwork and accounts are in order.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.1122-2LNM