If you’ve just received money from a divorce settlement but have no idea what to do with it, you’re not alone. No matter how long it’s taken you to get to this point, think of this settlement money as the green flag for the next stage of your life. Armed with the right knowledge, you’ll be confident about the choices you make for your family. In our latest webinar, we spoke with Jennifer Tozser CFP, CFA from Tozser Wealth Management about how to turn your settlement into a safe and secure future and how to avoid some common settlement pitfalls. Read on the for key takeaways.
“The first thing to think about”, Jennifer told us, “is getting a clear picture of how much money you’re going to receive and for how long —you’ll need to plan a budget based on those factors.” A divorce can set you back 10 years financially. It’s important to plan for the future and use your settlement money wisely so you’re not back to square one when it ends.
When It’s NOT Best To Pay Down Your Mortgage
After receiving a lump sum from a divorce settlement, people often think, “I’m going to live mortgage free and have no expenses!” But are you really getting the most out of your money if you just pay down your mortgage? Your home still has ongoing costs: upkeep, property taxes and other maintenance expenses. What if you need new windows or your hot water heater goes out? If you don’t budget for other expenses and save for a rainy day, you will be left with regret about using that settlement money to pay down your home mortgage.
In the long-term there’s another, potentially bigger, downside to putting all your money in your house. Jennifer says “In addition to not having cash available for expenses, when you put money into a house—which is a fixed priced asset—you remove the potential for future growth from that money.” Simply put, you lose the ability to turn that money into more money.
For anyone trying to plan their financial future, it’s important to run the numbers and explore different scenarios. If you pay down your mortgage now, how much are you actually saving in interest? Right now we have record low interest rates and you might not save that much as you would be earning if you put that payment into a different investment.
How many years you have left until retirement, if you plan on working those years, current interest rates and your investment portfolio are just some of the factors to take into consideration.
Spousal Support (or Alimony) Won’t Last Forever
The fact is, that spousal support you’re receiving now will end. And when it does, you want to be prepared. “You need to plan for that now before the money is spent,” Jennifer explains. “Every separation agreement is different, but on average alimony will last five years. Keep in mind though, there could be lifestyle changes—such as retirement, a job loss or other events—that can change your situation.”
Child support also ends. So “before you spend that money,” Jennifer explains, “you have to think about, ‘when the support ends and I have no money left, what am I going to do?’”
There are three variables you want to make sure you consider to make your money last as long as possible:
- Variable spousal support
- Variable child support
- How long the kids will go to school for (if applicable)
In some cases, you may receive variable spousal support and/or variable child support. With variable support, the amount you receive can change depending on your spouse’s income. This is often the case with high-income households where one year you might receive $1 million and the next $200,000. Planning for this varying income can be a challenge but all too often people who live in high income households don’t budget anyway—they just haven’t needed to before. In these cases especially it’s important to sit down and review your assets to ensure you can maintain your lifestyle.
Another thing you need to plan for is how long your kids will be going to school for. Will they go to university? Will they continue on to get a PhD? If you plan to continue to support your kids’ throughout their schooling, you will need to factor in how long as part of your future expenses and then budget accordingly.
What if You’re Not in a High Income Household?
For slightly more modest-sized payouts, of say, $100,000, should you put some money in the market? Jennifer tells us, “it depends on how old you are.” She adds, “Look at it this way, 50 percent of Canadians who go into retirement have less than $100,000 worth of assets and around a third of people have no savings at all. So if you receive $100,000 from your divorce at 65 and that lump sum is all you have, you might need to keep a good portion of that available.” Whereas , “If you’re 30 or 40, depending on what your portfolio looks like, you probably need to get started investing. Investing in the stock market is a necessary evil…no one’s going to look out for you but you so have to get started.”
Investing in Your Home vs. Investing in the Stock Market
With interest rates so low and with no real guarantee in the stock market, you might think the closest thing to a guaranteed return is putting that money in your home. Deciding what to do with your home in a divorce is an emotional issue. Jennifer says she doesn’t advise people on whether or not to sell their house, but to take a hard look at what will likely happen if they do or if they don’t. It’s important to try and take emotion out of your decision making and think realistically about your finances.
“People often want to know about risk-free investing”, Jennifer says. “The difference between paying for a mortgage and investing in the stock market is that debt is certain but stock and bond returns aren’t.” Then again, you have to question whether paying down a mortgage makes sense when you know for certain that your home won’t generate consistent income for you. You have to have some balance and perspective.
In many cases, you will have more money in the end if you are able to invest at least part of your settlement. Working with an advisor, you can determine what is the best approach for you to maximize your divorce settlement money.
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Your Webinar Hosts
Diana J. Richmond
Partner, Richmond Tymchuk Family Law
Diana J. Richmond has practiced law in Calgary since 2000 and is a founding partner at Richmond Tymchuk Family Law LLP. Diana is a skilled negotiator in all areas of family law and speaks both French and English fluently. As a wife and mother, Diana understands how emotional divorce, separation and child custody issues can be, and works to get to know you and the complexity of your family so she can do what she does best – provide you with practical advice and help resolve your issues as efficiently as possible.
Senior Vice President, Tozser Wealth Management
Jennifer Tozser been in the wealth management industry for over 20 years helping clients create wealth, plan for retirement, transition into retirement and create legacy. She has seen some of the best and worst markets in our history and this has made her a better portfolio manager. The unpredictability in the markets has certainly taught the importance of having and maintaining discipline when it comes to navigating the markets. Jennifer works closely with our families to ensure a successful outcome when dealing with the more stressful events of life such as decease of a spouse, divorce, unexpected loss of your job and sale of a business.