Jan L. Warner & Jan Collins
Question: Since my husband and I divorced more than a year and a half ago, I have had nothing but problems getting my finances straightened out. During our marriage, I stayed home with the children and bought groceries. I didnít know what was owned or owed. I didnít even know my monthly expenses. My lawyer told me that many women were like me. With help, I was able to piece together my expenses to prepare the financial statements required by the court. My lawyer helped me settle my case, and I got some equity from the sale of the house, a part of my husband's pension and profit sharing plan, a car, some furniture, and support and alimony. My lawyer told me how well I had come out and that I would catch on when I started handling things on my own. But I havenít, and find myself a 55 year-old financial illiterate. After a year, I found a job and earned minimum wage until I was laid off. I go into my savings and IRA every month. I have borrowed from my parents. I went to banks and brokers for help, but I don't have enough money to interest the banks and the stock market scares me to death. I have even tried financial software, but I'm still lost. I am really scared that with the problems I am having now, I will never have enough to retire, and don't know what to do. I wake up every night worrying. What can I do?
Answer: Like you, when most people divorce, they get so caught up in the proceedings that they don't plan for their financial futures. This is especially true for women who have not been included in making the financial decisions during the course of the marriage. And not planning is a big mistake.
When you prepared your financial statement, you actually prepared a financial plan for your future. Once done correctly, the next step should have been a plan to get you enough cash flow to cover your monthly expenses after taxes. Your sources of cash flow would be your employment, alimony and child support being paid by your former husband, interest or dividends earned from your savings, and, when necessary, withdrawals from qualified monies such as those in your IRA according to a coordinated plan. The last step should have been to estimate the amount of income taxes you would be required to pay on your earnings, your alimony (if it is taxable to you), and the earnings from your investments.
Since you are being required to take withdrawals from your IRA before reaching age 59 1/2 because you need the money, this was obviously not part of your initial plan, and you will incur not only income taxes, but also a 10 percent penalty for taking premature distributions. Had you planned to invade your IRA initially, you could have made sure that at least some monies were available for your retirement and could have avoided the ten percent penalty by choosing to take a stream of substantially equal payments for the greater of five years or until you reached age 59 Ĺ.
Bottom line: Because your expenses exceed your after-tax cash flow, at best, your initial planning was incomplete. We suggest that those going through divorce -- especially folks with no experience in the financial and retirement worlds -- engage fee-only financial planners or certified public accountants who are attuned to these issues. As you describe it, you are in a financial vortex that, over time, will drag you underwater unless you grab a qualified professional as your life vest now. As you have learned, cash flow is often more important than having assets when making monthly ends meet is on the line.