Rebalance’s Christie Whitney talks budgeting, retirement savings, and inheritance protection with Ilyssa Panitz on her Divorce Hour segment.
Ilyssa Panitz: Experts may tell you that divorce often comes down to money, and there’s a lot of truth to that. When you’re dividing shared assets like a home, cars, bank accounts, retirement, savings, artwork, and more, everything has a dollar value. And depending on where you live, the law will determine how those assets are divided to make the process fair for both sides, but here’s the problem: going into a divorce without any financial knowledge can leave you vulnerable and without proper financial guidance or information. And if that’s the case, how do you protect your future? Well, Christie Whitney knows exactly how important it is to be prepared. She’s a certified financial planner, advisor, and senior vice president of the wealth management firm called Rebalance. Christie, welcome.
Christie Whitney: Thank you so much.
Ilyssa Panitz: Thank you for being here. And look, divorce is an emotional process, and that can make it difficult for people to think clearly about their finances. As a certified financial planner, why should someone start with a basic financial blueprint that includes a list of things like we just mentioned: assets, debt, household inventory, ongoing expenses, and also bills that should be paid and when they need to be satisfied?
Christie Whitney: Yeah, absolutely. I think this is something that ideally every individual has a handle on, but the reality is that’s not the case. Divorce is a time of huge financial and lifestyle transition, and of course, as you mentioned, it’s very emotionally charged. What I see quite often in couples is that one person is more aware than the other of what it takes to run the household. Maybe one person’s doing the investments and one’s doing the bill-pay type things, or it’s all on one individual. So it’s super important to get a handle on what your expenses look like with your new reality, whether you’re the one keeping the family home or you’re the one with a new living situation that has different financial implications. You really need to get your head around all of those different pieces and what that new budget is. I also think having a sense of that will help you negotiate what’s fair for yourself if you are not yet divorced and are going through the process.
Ilyssa Panitz: Why is it important for someone going through a divorce to schedule an annual financial check-in with their financial advisor, especially if they have never been the one who’s in charge of the money?
Christie Whitney: Yeah. Again, I think in particular, if you’re not the person who’s been in charge, you need to be educated on where your money is and how it is growing for you, and sometimes only one member of the couple is involved in that relationship. So that is also a time to stop and pause and think: Do I want to work with this same individual? We view it as a conflict of interest if you’re using the same advisor to manage a relationship that is now broken into two different financial households. But if you do like the firm you’re working with, maybe there’s another competent advisor on the team that you can join and work with going forward. Having those meetings and having someone be a partner for you is really important. More and more these days, the professional investment community has moved away from just talking about stocks, bonds, and cash flow. With the rise of certified financial planners, people are asking more of their relationships with firms like mine, so we talk about things like retirement income planning: Do you have enough insurance coverage? How am I going to map out my finances going forward? So that relationship for you can either expand or blossom, depending on your role in it pre-divorce.
Ilyssa Panitz: Gray divorce, the demographic of adults age 50 and older, as AARP defines it, is still on the rise. Many of these individuals are also caring for aging parents and may receive an inheritance once they pass away. Why is it important to keep inherited assets separate, and what steps can someone take to protect that inheritance during and after a divorce?
Christie Whitney: That’s a great question. I want to be clear that inheritance money does not have to be kept separate, but you need to be aware of what happens if you commingle it, meaning you receive the money and put it in your joint account instead of keeping it in your name. In most states, that act makes it become a joint asset of the marriage, and it can be deemed a gift or just treated as a joint asset. So if a divorce occurs down the road, money that’s been designated for your side of the family for generations can be lost. Again, it’s a decision for couples to make and think about: Do they care? Some clients and couples don’t care if it’s joined together indefinitely. But it’s important to understand that once you do join it, it is no longer your sole inheritance, your sole family money in your name.
Ilyssa Panitz: Some divorces can be expensive, and in today’s economy, many people are struggling with higher grocery bills, housing costs, and obviously prices at the pump. Is it still possible to contribute to a 401(k) or another retirement account, and if so, how does somebody budget and set money aside for this?
Christie Whitney: Sure, that’s a great question. It’s tough when finances are so tight and you don’t know how to possibly squeeze any more out of it. I’ll just say everyone has to save, and we want to see people starting to save. If they don’t have the assets now and it’s very difficult, at least start building a small emergency fund of a couple thousand dollars. Most folks out there don’t have pensions anymore to provide for them in retirement, and Social Security only makes up a piece of the puzzle. So it’s imperative that you find a way to save something. You might say, “Well, I don’t have anything.” Well, are you eating lunch out twice a week or dinner out twice a week? Are you buying three Starbucks drinks a week? Fifteen, twenty dollars here and there. Multiply that by four weeks in a month, and all of a sudden you’ve got a hundred fifty, two hundred dollars that can be saved. So I think it’s imperative to look at that and always build at least an emergency fund, and then get beyond that to your company 401(k). If you are afforded a match, which is very common within 401(k)s, that’s free money to you, so it’s very sad when that’s passed up.
Ilyssa Panitz: You just talked about a cash reserve, and you recommend keeping an emergency cash reserve for your clients, especially during and after a divorce. First, how much money should somebody set aside? Second, when does this come in handy? And third, how much should somebody have in cash for those “oh my gosh” moments?
Christie Whitney: Sure. Well, that number is going to be different for everybody based on their household expenses. But in terms of the savings rate, ideally, if you are on your own and solely responsible for your financial household, you want to have six months of your mandatory expenses: food, gas, rent, mortgage, and so on. And if you are in a couple, in a two-earning household, you can reduce that to three months. We all have to have a slush fund because cars break down, heaters go out, and surprise medical expenses come along. So if you’re not able to build up a robust emergency fund, start with two to five thousand dollars just to have something there. The main thing is you’re trying to avoid using consumer debt and credit cards, and getting into that whole spiral.
Ilyssa Panitz: Sometimes people need to tap into their retirement savings. My question to you is: When is it appropriate to tap into retirement savings, and what are the potential tax consequences and penalties of withdrawing that money before reaching retirement age?
Christie Whitney: Yeah, that’s a great and very important question. Your retirement money is your most protected money because it’s growing tax-deferred, and there are penalties if you take it out early. In a traditional 401(k) or IRA, if you tap into that money before age fifty-nine and a half, you will not only be paying the taxes due on that money, but you’re also paying a 10% penalty, so this should be avoided at all costs. If there is other money you can draw upon before fifty-nine and a half, use that instead. There are some rare exceptions to that 10% penalty, and that might cause you to pause and consider: Do we leave money in the 401(k)? Because then you can access it a little bit earlier, at fifty-five. The other thing I’ll mention here is that often in divorces, one individual has a larger 401(k), and if that money is divided between the two, that’s called a qualified domestic relations order. If that transpires and money is going from one person’s retirement account to another, it doesn’t matter your age: there’s no tax implication.
Ilyssa Panitz: But what if somebody wants to borrow the money temporarily and then put it back? Are they still going to get hit with those taxes?
Christie Whitney: For a 401(k), you can take a loan against it and pay interest. That loan will be due if you leave your workplace. For an IRA, the only way you can borrow from it is to replace the funds within 60 days. That’s very temporary in nature, and you would be hit with taxes and a penalty if you do not put it back within the 60 days.
Ilyssa Panitz: So, for somebody going through a divorce, you also recommend creating a budget. What does a budget look like, and what should somebody have on that list?
Christie Whitney: Sure. A budget ideally covers everything you spend money on. I would start with the mandatory, must-do things: rent, mortgage, cars, food. Then you get to what’s discretionary, and that’s often where there can be a lot of trimming, if needed, because divorce requires a lot of lifestyle adjustments for many people.
Ilyssa Panitz: That it does. Great advice, Christie. For people who want to get in touch with you, how do they do that?
Christie Whitney: I work with a company called Rebalance, and our website is www.rebalance360.com, where we have a button where you can schedule a consultation with us.
Ilyssa Panitz: And is there a phone number people can reach you at as well?
Christie Whitney: Our phone number is 650-396-3900.
Ilyssa Panitz: Christie, thank you so much for joining us. And when we come back, we’re going to talk about the jaw-dropping interview Brad Pitt gave, and the one thing he said that nobody saw coming, and what you can do to protect yourself if these feelings come on. Don’t go away.
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