Atlanta Financial Blog
My Divorce is Final – Can I Afford to Stay in my Home?
June 4, 2019
One of the most emotional decisions you may face following your divorce is whether to stay in your current home or not. When confronted with so many other changes, many people going through divorce decide NOT to change their housing, since it seems like one of the few things they can still control. For some, that can be a big mistake. Since housing costs may be your single largest expense, getting this decision “right” can have a huge impact on you and your family’s financial well-being in this next phase of your life.
How can you decide if hanging on to the marital home is a mistake? A common rule of thumb for housing affordability is that housing costs should be no more than 30% of your monthly gross income. If you own your home, that figure should include mortgage payments, property taxes, homeowner’s insurance, hoa fees and maintenance). If you rent, it should include your rent plus utilities. Conventional wisdom presumes that limiting your housing expense to 30% of your monthly gross income should allow some breathing room for all the other necessary expenses you will face, both those you plan for and those that are surprises.
Of course, the problem with rules of thumb and conventional wisdom is that they work for the “average” person but may not be at all valid for you. Before deciding what housing expense you can afford, here are some questions you should ask yourself:
• How stable is your income? If your income depends on commissions or irregular bonuses, do you have adequate cash reserves to tide you over during the low parts of your income cycle?
• If you are relying heavily on alimony, what will you do when the alimony ends? If you don’t have a realistic plan to reduce expenses or increase income by an equivalent amount once it ends, you may need to save a good portion of the alimony payments for when it ends.
• What is the age and condition of your home? Is there expensive “deferred maintenance” looming around the corner?
• Does the size of the home and surrounding property fit your new circumstances and smaller household? Or would downsizing fit your needs better?
• Can you maintain the land or property on your own, or afford to pay others for those services?
• Now that the marital assets have been split, how adequately prepared will you be for retirement? You may need to save more aggressively now to make up for assets lost in the divorce and excessive housing costs can make that difficult or impossible.
Over-spending on housing can add enormous financial stress and even jeopardize your financial future. When we work with people going through or recently divorced, we start by putting all parts of the post-divorce budget on the table. We help assemble an accurate budget, including reasonable estimates for things that may be changing, like taxes, health insurance, income, etc. Then we begin to help our client “reimagine” their life post-divorce. We build detailed financial projections so that the client can see the impact on their future wealth of the choices they are considering. Does staying in the home lead to a decline in net worth and a fragile financial future, or is it affordable? Having a better handle on what the financial future is likely to look like can inform decisions and provide important peace of mind.
What if all this analysis shows that you can afford (both short-term AND long-term) to stay in the marital home? If that is the case for you, doing just that may be the right choice for you and your family. There are times, however, that staying anchored to our past choices can prevent us from envisioning better ones. I remember during my own divorce promising my almost grown children that we wouldn’t sell their childhood home for two years. Why two years? Honestly, it was just what came out of my mouth when I saw their pain. At the time I couldn’t imagine that either my girls or I were ready to envision anything different any sooner. With a little distance from all the emotional turmoil, however, I quickly realized that I had made this promise rashly, and that staying in the marital home was not the right choice for any of us. It was huge, required constant, expensive maintenance, had out-of-control utility bills, and came with a 2 hour+ round trip commute for me. Both girls were in college or recently graduated, so “home” was a place of memories, but no longer important in terms of friends or school. I began to look at other options, and once I had narrowed the choices down to the finalists in my eyes, I included my children in the search. They quickly got onboard with the new home, excited by a “cooler” in-town location for them and a 15-minute commute for me.
For those of you facing these difficult choices, please get help and guidance from a financial professional to understand the long-term impact of this important choice. Spend time with friends, family and those you trust envisioning all the possibilities the future might hold. If we at Atlanta Financial can help, know we stand ready and willing to help you with our proprietary DivorceFIT process, so that you enter this next phase of your life confident in your financial future.
The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act was signed into law on December 20, 2019. With all of the discussion in the news around the political uncertainty, impeachment, and the looming trade war, one of the largest changes to retirement savings laws in recent years was passed with very little fanfare. However, some of the changes will be significant. I have tried to highlight what may impact the majority of our clients and readers.
The Act has a lot of positives such as simplifying rules and making 401k plans potentially available to more workers, pushing back the RMD age, and allowing contributions to IRAs past age 70. The negative impact I see is the elimination of the stretch IRA which is a clear move by the government to raise tax revenues by forcing money out of inherited IRAs sooner. I will discuss in more detail below, but this should be a time to review beneficiaries and discuss whether any change in your legacy planning should be made in response to the new laws. What do you need to pay attention to?
A few months ago, I saw a sale sign in front of my neighbor Gina’s house. She’s lived on my street even longer than I have, so I was surprised that she was selling her home. I bumped into her a week later at the supermarket and asked her where she was planning to move. She told me (with some regret) that she was downsizing to a less expensive house. The alimony payments she’d been getting from her ex-husband had ended last year, and she hadn’t prepared for the loss of that income. She soon realized she could no longer afford to live in her home.
I’d like to believe that everyone understands the value in a year-end review of their personal finances. Statistics that I’ve seen indicate that over half of people who make resolutions indicate a change to household finances and saving money is a priority in the new year1. What is a bit of surprise to me is that so many put off (or neglect all together) actually reviewing their finances before year’s end. My conclusion: one of the biggest deterrents is the time it takes to get things organized.
When it comes to being successful with money, strong organization will empower you more than anything else you can do to take control of your finances moving forward. With my personal and professional understanding of the challenges of this process, I’ve put together an 8-step checklist to get your finances organized, take inventory of where you stand, and ultimately get you ready to close the books on 2019.