Divorce can be a rollercoaster of emotions and decisions. While it’s easy to get caught up in the immediate logistics, some of the most critical choices you’ll make during this time involve your financial future. Avoiding common pitfalls can save you from unnecessary stress and help you move forward with confidence. Here’s a look at some of the most frequent financial missteps people make during divorce—and how to steer clear of them.
1. Overlooking the Cost of Keeping the Marital Home
For many, the marital home represents stability and security during a time of upheaval. However, keeping the house isn’t always the best financial decision.
For example, consider the case of someone who chose to keep the home, only to realize later that the maintenance costs, property taxes, and mortgage payments far exceeded what they could afford on their post-divorce budget. Selling the home during the divorce might have provided much-needed liquidity and allowed for a fresh financial start.
Ask yourself:
It’s not about letting go of sentimental value—it’s about making choices that align with your financial goals.
2. Underestimating the Complexity of Retirement Accounts
Retirement accounts can be one of the trickiest assets to divide in a divorce. Beyond the balance listed on the statement, you need to account for taxes, penalties, and the rules governing each type of account.
For instance, a 401(k) may require a Qualified Domestic Relations Order (QDRO) to divide it without triggering taxes or penalties. An IRA, on the other hand, doesn’t require a QDRO but comes with its own rules for division.
If you’re negotiating a division, consider more than just the dollar value. A $100,000 Roth IRA, which grows tax-free, isn’t the same as a $100,000 401(k), which will be taxed upon withdrawal. Consulting with a CDFA or another financial professional ensures you’re making equitable decisions.
3. Assuming Joint Debts Will Be Split Equally
It’s a common misconception that divorce automatically splits joint debts down the middle. In reality, creditors aren’t bound by your divorce agreement. If your ex-spouse fails to pay their share of joint debt, you could still be held responsible.
One example is a couple who divided their credit card debt during the divorce, only for one spouse to stop making payments. The creditor pursued the other spouse for the full balance, damaging their credit in the process.
To avoid this, consider refinancing joint debts into individual accounts wherever possible. If that’s not an option, closely monitor accounts post-divorce to ensure payments are made.
4. Neglecting to Account for Hidden Costs of Divorce
Divorce isn’t just about dividing assets—it’s also about dealing with the hidden costs that pop up along the way. For example:
These costs can add up quickly and derail your financial plan if you’re not prepared. Build a post-divorce budget that factors in these expenses so there are no surprises.
5. Failing to Identify Hidden Assets
Unfortunately, not all divorces are amicable. Some spouses may go to great lengths to hide assets, from transferring funds to undisclosed accounts to undervaluing a business.
Red flags include:
If you suspect hidden assets, having a financial specialist on your team like a CDFA and/or a forensic accountant is crucial. Uncovering these assets can mean the difference between a fair settlement and leaving money on the table.
6. Not Considering the True Value of Liquid Assets
During settlement negotiations, liquid assets like cash and investment accounts often seem more attractive than illiquid assets like real estate or retirement accounts. But liquidity isn’t everything.
For instance, taking a large cash settlement may seem ideal until you realize it doesn’t grow over time the way an investment portfolio or retirement account might. Conversely, agreeing to take an illiquid asset, like a vacation property, could leave you asset-rich but cash-poor.
Balance liquidity with growth potential. A CDFA can model different scenarios to help you understand the long-term implications of your choices.
7. Forgetting to Update Legal and Financial Documents
Divorce doesn’t automatically update things like beneficiary designations, wills, or powers of attorney. Failing to make these updates can lead to unintended consequences.
For example, if you leave your ex-spouse as the beneficiary of your life insurance policy, they may inherit those funds even if your divorce agreement states otherwise. Similarly, neglecting to update your healthcare proxy could leave your ex-spouse in charge of critical medical decisions.
Take the time to review and update all legal and financial documents to reflect your post-divorce wishes.
8. The Divorce Decree Isn’t the Final Step
Many people believe that once the divorce decree is signed, the work is done, and the assets will automatically appear in their accounts. Unfortunately, that is not the case.
After the agreement is finalized, there are critical next steps, including:
A CDFA can guide you through these steps, ensuring that nothing falls through the cracks and your settlement is fully implemented.
9. Skipping Professional Financial Guidance
Too often, people try to save money during divorce by forgoing professional advice. But without proper guidance, you risk making decisions that could cost you far more in the long run.
A Certified Divorce Financial Analyst (CDFA) can provide clarity on:
The upfront investment in professional help is often outweighed by the confidence and financial independence it brings.
Final Thoughts: Put Your Financial Future First
Divorce is one of life’s toughest transitions, but it’s also an opportunity to create a new FOUNDATION for your financial future. By avoiding these common pitfalls, you can make smarter decisions that support your long-term goals.
Remember, you don’t have to go through this alone. With the right professionals by your side and a clear plan in place, you can navigate the financial challenges of divorce with confidence and control.
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.
The foregoing information has been obtained from sources considered reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Elana Milianta and not necessarily Raymond James.
