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Top tips: Try to avoid any hasty decisions regarding real estate, and take the time to ensure you have the amount and type of insurance coverage you need.
Right off the top, it’s important to acknowledge that there are no secret strategies for magically avoiding the financial impact of divorce. Divorce is difficult. You may lose half of your assets—or more—during the process of equalization. You may have ongoing spousal support or child support obligations to an ex-spouse. There can be differences from province to province, and equalization and support may depend on whether you were legally married or common law, or if you have children together. Divorce terms are sometimes the result of prolonged negotiation, or even contentious litigation, as opposed to a simple form or formula.
Bouncing back emotionally can be hard. Doing so financially can also be difficult. Focusing on the short-run moves to get on track can be the best approach.
I think it is important not to make any knee-jerk reactions regarding real estate. The cost of buying and selling can be expensive. Buyers in cities with municipal and provincial land transfer taxes may pay more than 3% to buy, and real estate commissions to sell can be more than 5% of the sale price. If you can afford to stay in your matrimonial home, even temporarily, it could be a way to get your bearings. If you must sell quickly, renting for a period if you are unsure of what to do in the long run is not a bad idea, either. Transaction costs of buying something hastily, then changing your mind and having to sell hastily can negate any potential benefit of buying in the first place.
It’s also important to consider the impact of divorce on your benefits. If your health coverage was under your ex-spouse’s group plan, you may no longer be covered. Consider whether to make changes to your own group health plan or not, if applicable. Private health care coverage to replace lost coverage under your ex’s group plan may not be worth the cost, or may not be as important as considering other types of insurance.
You may need to increase your life insurance coverage to ensure your support obligations are fulfilled in the event you die. Maintaining or securing life insurance is often a term included in a legal separation agreement. If you have kids, you may want to ensure adequate financial resources for them in the event something happens to you.
It is also important to ensure adequate living benefits coverage, like disability and critical illness insurance.
Disability insurance replaces your income in the event you are disabled and cannot work. It is generally a percentage of your income or a monthly amount. Group plans often fall short of fully replacing your income, so additional private coverage may be advisable for anyone, but particularly someone recently separated or divorced.
The significance is that if you are married, you may be able to rely on financial and other support from a spouse if you become disabled. Not that being married is a reason to not have adequate disability coverage—but being single is a definite reason to make sure you can take care of yourself financially if you cannot work due to injury or sickness.
Critical illness insurance can be supplementary to disability insurance, and pay out a lump-sum amount in the event you are diagnosed with a list of policy-specific critical illnesses. This lump sum can be used for any purpose, whether it be care, expenses or otherwise.
Consider whom to designate as your beneficiaries for your life insurance, retirement savings plans and Tax-Free Savings Account (TFSA). You may want to name your children if you have any; however, if your kids are under the age of majority, you may be better off naming your estate as the beneficiary so that your will dictates the terms for money held in trust until they are adults.
Speaking of your will, you should consider updating it. You may no longer want your estate to go to your spouse, or to have them as your executor and trustee. Depending on your province of residence, you may have powers of attorney, personal directives, mandates, or similar documents to appoint someone to make health care or financial decisions if you are sick, injured, or disabled. Revisit these estate planning documents.
There may be different tax deductions and credits you can claim as a single person or single parent that you were not eligible for previously.
As you divvy up investments with an ex-spouse, it is a good time to review those investments. You may have a different risk tolerance as a single person than when you were married. It is your money, and you should invest it based on what is suitable for you, and where it is suitable for you to invest. You may or may not want to continue to invest with the same advisor or investment firm, or you may no longer meet their minimums if you have divided up your assets. Regardless, it is a good time to review your portfolio.
As the dust settles from divorce, it is important to re-evaluate your long-term financial plan. You should reconsider savings versus debt repayment. Debt repayment may be more important depending on your debt level, type of debt, your risk tolerance, whether you have a company retirement or savings plan, your tax bracket, and so on.
You should also be re-prioritizing saving and debt repayment targets to set retirement goals on your own, as a single person. Yes, it’s true that single people often get into new relationships and must subsequently reset their financial goals—but until you’re actually in that position, you should plan to be single and understand what that means in the long run.
The most important thing to do financially after a divorce is to remind yourself, as difficult as it may be, that the only certainty in life is change. Partners divorce, partners die and partners become disabled. You may lose your job, need to support your adult children, need to take care of your aging parents, receive an unexpected inheritance, or win the lottery. Hopefully the unexpected is more good than bad, but we never know what the future holds.
Financial planning is not a straight line. Divorce is generally a negative, financially speaking, but it is a reality that nearly half of Canadians will contend with during their lifetimes.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
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