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 is a lot of truth to that. When you are dividing shared assets like a home, cars, bank accounts, retirement, savings, artwork, and more, everything has a dollar value. Depending on where you live, the law will determine how those assets are divided to make the process fair for both sides.
But going into a divorce without financial knowledge can leave you vulnerable and without proper financial guidance or information. If that is the case, how do you protect your future?
Christie Whitney knows exactly how important it is to be prepared. She is a certified financial planner, advisor, and senior vice president of the wealth management firm Rebalance. Christie, welcome.
Christie Whitney: Thank you so much.
Ilyssa Panitz: 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 assets, debt, household inventory, ongoing expenses, and bills that should be paid and when they need to be satisfied?
Christie Whitney: Ideally, every individual should have a handle on these things, but the reality is that is not the case. Divorce is a time of huge financial and lifestyle transition, and it is also 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 handles the investments while the other handles the bills, or everything is managed by one individual.
It is important to get a handle on what your expenses look like with your new reality, whether you are the one keeping the family home or the one with a new living situation that has different financial implications. You need to understand all of those different pieces and determine what your new budget looks like.
Having a sense of that will also help you negotiate what is 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 is in charge of the money?
Christie Whitney: In particular, if you are not the person who has been in charge, you need to become educated on where your money is and how it is growing for you. Sometimes only one member of the couple is involved in that relationship.
That is also a time to stop and think: Do I want to work with this same individual? We view it as a conflict of interest if you are using the same advisor to manage a relationship that is now broken into two different financial households.
If you do like the firm you are working with, maybe there is 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. We talk about things like retirement income planning, whether you have enough insurance coverage, and how you are going to map out your finances going forward.
That relationship can either expand or blossom, depending on your role in it before the 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 is 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 simply treated as a joint asset. If a divorce occurs down the road, money that has been designated for your side of the family for generations can be lost.
It is a decision for couples to make and think about. Do they care? Some clients and couples do not care if it is joined together indefinitely. But it is important to understand that once you do join it, it is no longer your sole inheritance or 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 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: It is tough when finances are tight and you do not know how to possibly squeeze any more out of your budget. Everyone has to save, and we want to see people starting to save.
If they do not have the assets now and it is very difficult, at least start building a small emergency fund of a couple thousand dollars. Most people do not have pensions anymore to provide for them in retirement, and Social Security only makes up a piece of the puzzle. It is imperative that you find a way to save something.
You might say, “Well, I do not have anything.” But are you eating lunch out twice a week or dinner out twice a week? Are you buying three Starbucks drinks a week? Fifteen or twenty dollars here and there, multiplied by four weeks in a month, can become $150 or $200 that can be saved.
It is imperative to look at those expenses 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 is free money to you, so it is very sad when that is 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: That number is going to be different for everybody based on their household expenses. 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.
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. If you are not able to build up a robust emergency fund, start with $2,000 to $5,000 just to have something there.
The main thing is that you are 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. 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: That is a very important question. Your retirement money is your most protected money because it is 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 59½, you will not only be paying the taxes due on that money, but you are also paying a 10% penalty. This should be avoided at all costs.
If there is other money you can draw upon before 59½, use that instead. There are some rare exceptions to that 10% penalty, and that might cause you to pause and consider whether to leave money in the 401(k), because then you can access it a little bit earlier, at age 55.
The other thing I will mention is that often in divorces, one individual has a larger 401(k), and if that money is divided between the two, that is called a qualified domestic relations order. If that transpires and money is going from one person’s retirement account to another, it does not matter your age: there is 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 is 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: 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: A budget ideally covers everything you spend money on. I would start with the mandatory, must-do things: rent, mortgage, cars, and food.
Then you get to what is discretionary, and that is often where there can be a lot of trimming, if needed, because divorce requires a lot of lifestyle adjustments for many people.
Ilyssa Panitz: Christie, thank you so much for joining us. And when we come back, we are 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. Do not go away.
