Investing After Divorce: The Road to Financial Recovery
Guest Post: By Faisal Karmali
There is no getting around it. Divorce is emotionally devastating, but it can also be very financially damaging.
You go from two incomes to one. Suddenly you are funding most of the expenses you had prior to your divorce, but with half the assets. If your former partner handled the household finances during your marriage, you may have to relearn how to manage your expenses independently.
Depending on your divorce settlement, you may have walked away from your marriage with few assets, but a large settlement cheque. Alternatively, you may be in a position where you are asset-rich but cash-poor, which could pose a problem when it comes to funding your lifestyle. You may also be making support payments on top of your regular costs.
Rebuilding your finances post-divorce is a process. It takes time. But where do you start?
Take Inventory and Address the Gaps
The first step to rebuilding your financial independence is taking stock of your new reality. Take an inventory of your assets, including savings, investment accounts, retirement accounts, pension plans, and real estate. Also take an inventory of your liabilities. What debts, if any, has your divorce left you with?
Once you have a good understanding of your overall financial picture, assess the gaps your divorce has created. If you received a larger asset like the family home, your primary need may be cashflow. A house will not pay the bills, so it is important to build a realistic post-divorce budget that accounts for all your expenses. If you did not receive the house, saving for a new home may be at the top of your priority list. If your retirement savings took a hit during the divorce, that may be an area of concern for you.
Assemble a Team and Analyze your Portfolio
Whatever your financial needs and priorities, it is important to assemble a team to help you achieve them. This team may include a financial advisor, an accountant, a lawyer, and an insurance broker. But be forewarned: having multiple people creating potentially conflicting strategies can become an issue. That is why I would recommend selecting a ‘quarterback’. This person could be you or it could be one central advisor. It is this person’s responsibility to drive the strategy and keep everyone on your professional team organized, informed, and on the same page.
Sorting out your investments can be a particularly overwhelming part of your financial recovery process, especially if your former spouse managed them in the past. This is where a wealth advisor can become a great partner. Sit down with your advisor to do an analysis of your current portfolio. You may own things that are no longer right for you. Scrutinize each investment to see if it makes sense for your current priorities, timeline, and risk tolerance. Together, develop a strategy that reflects your post-divorce situation.
Develop an Investment Strategy
Your investment strategy should always start with your goals. Different families and individuals will have different goals. However, in my experience as a portfolio manager working with newly divorced clients, one of the most immediate objectives is income. You may have income from a job, spousal support, or child support. Your first priority should be to stabilize and secure that income to ensure you have enough cash flow to cover your day-to-day expenses. Even if you have received a large settlement cheque, hold off on making any big purchases until your cash flow is secure.
A second area that is very important, but often put on the backburner, is growth. If you have lost half of your assets, the only way to get back on track is to grow your remaining wealth. But here is the challenge: if your finances take a major hit during a divorce, the temptation is to become completely risk averse to avoid losing anything further. However, if you avoid risk altogether, you sacrifice growth. I am not suggesting you put all your money into high-risk investments in a bid to recover the financial losses you may have suffered during the divorce proceedings. However, I do think that it is important to talk to an advisor about how to balance risk and return to put you back on the road to financial health and stability.
So how do you build your investment portfolio around these two, seemingly competing, objectives?
If you try to achieve both goals with the same assets, it is going to get messy. This is where asset dedication comes in. I often say that one of the superpowers of investing is structure. How you structure your portfolio really matters. That is why my team has created what we call ‘buckets’ in our clients’ portfolios. The income bucket is designed to provide a steady, predictable stream of income. Your income must be there when you need it, so the assets assigned to this bucket are not invested in the stock market and, thus, are not affected by market volatility. The second bucket–the growth bucket–takes advantage of volatility by investing in the market in strategic ways. As this bucket grows, it replenishes the income bucket.
One of the most common fears I hear from clients who have recently gone through a divorce is financial vulnerability. Without a partner, who will I turn to if I get laid off or have a financial setback? Who will be there for me if I have an unexpected health issue? What if inflation impacts my ability to fund my lifestyle? What if market volatility causes the value of my portfolio to drop?
It all comes back to strategy. Strategy gives you the roadmap you need to respond to what is happening in the markets, the economy, or even your personal life. When I build an investment strategy for my clients, I always think through questions like: What happens in the best-case scenario? What happens in the worst-case scenario? Will this strategy help my clients succeed no matter what comes their way?
Your strategy also needs to consider tax. The tax system in our country is often more advantageous for people who are married or in common-law partnerships than it is for single individuals. It is important to work with professionals who can look at your unique situation and develop a strategy to minimize your taxes and keep more money in your pocket to fund your lifestyle.
One of the key things I look at is what is the optimal way for my clients to withdraw money from their accounts? Most people have several different sources of income they can pull from: non-registered accounts, Tax-Free Savings Accounts (TFSAs), registered accounts like Registered Retirement Savings Plans (RRSPs), and–as they transition into retirement–the Canadian Pension Plan (CPP), Old Age Security (OAS), and corporate or government pension plans. Drawing income from these areas can trigger taxes, and each has a different tax treatment. If you are recently divorced and in need of income from your investments, you need a strategy for withdrawing the money you need in the most tax-efficient way possible.
Regaining financial independence and stability after a divorce can feel overwhelming. The most important step you can take is getting the professional help you need.
Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.
ABOUT THE AUTHOR:
Faisal Karmali is a senior wealth advisor with the Popowich Karmali Advisory Group, media personality, and business and market expert for QR Calgary and CTV. As a portfolio manager, he has dedicated his career to helping people improve their financial security as they prepare for and live in retirement.
Navigating the financial aftermath of a divorce requires careful planning, strategic thinking, and a supportive team. At Crossroads Law, we understand the multi-faceted challenges you face as you strive to rebuild your financial independence. Our experienced family lawyers, in collaboration with wealth advisors and financial experts, are dedicated to offering you personalized support, empowering you with the knowledge and resources needed to make informed decisions about your finances, investments, and overall well-being. Don't face these challenges alone. Contact Crossroads Law today to schedule your free 20-minute consultation.
