Looking beyond emotion to build real financial security after a divorce

Question

I am getting divorced. Everyone talks about the house, the pension and maintenance. From a financial planning perspective, what should a woman be looking at before she signs anything?

Answer

Divorce is a major life event emotionally and financially. Before you sign anything, make sure you are strong enough to make good decisions. I have seen many poor financial choices made by people who were exhausted.

Before you agree to a settlement, you need to know three things: what you are legally entitled to; what the family finances actually look like; and what your life will cost the month after the divorce is final.

Start with what you are entitled to

The first question is not what you want, but what you are legally entitled to get. Divorce settlements need to be grounded in the legal structure of the marriage and backed by proper documents.

This begins with the matrimonial property system. Were you married in community of property, out of community of property with accrual, or out of community of property without accrual? Your divorce lawyer will help you understand what you are entitled to based on the way you were married.

Get a full picture of the finances

You need a proper picture of the estate: bank accounts, investment accounts, bond statements, vehicles, business interests, credit cards, personal loans, tax returns and any suretyships. Do not just ask what assets exist, but what debts there are, too.

Three areas deserve special attention:

The family home

Many people want to keep the family home because it feels like security and offers continuity. I understand that, but a house can be an emotional win and a financial trap.

The real question is whether you can afford it on your post-divorce income. Can you cover the bond, rates, levies, insurance, maintenance and repairs? Can you buy out your spouse? Are you keeping an asset you can live in, but not live from?

A settlement can look generous on paper and still leave you exposed. R3-million tied up in a costly property is not the same as R3-million in a diversified, tax-efficient investment portfolio with liquidity.

Retirement funds

Retirement funds are often one of the largest assets in a divorce. South African law allows a spouse to share in the other spouse’s pension interest on divorce.

Do not treat it as some vague future issue. You need to know what funds exist, what the pension interest is worth, how the divorce order is worded, and which options apply when the benefit is paid or transferred.

It is best to get your share of these funds transferred to you to invest in a pre­servation fund in your name. This is the most tax-efficient solution and will give you control.

Maintenance for children

Maintenance is another factor where people make bad decisions because they are angry, tired or desperate for the process to end.

Child maintenance is based on the child’s reasonable needs and the parents’ respective means. You need a proper budget, not a rough estimate. If you do not know how to prepare a budget, send me an email and I will forward a budget template to you.

Build a plan for life after the divorce

What will your monthly budget look like once the legal process is over?
What income is guaranteed?
Which expenses are non-­negotiable?
How much emergency cash will you need?
What happens to your medical scheme cover, risk cover, will, beneficiary nominations and retirement planning?

Too many women leave a divorce with a capital amount but no real plan for protecting it. A lump sum is not the same as financial security. Without a strategy, money gets eaten up by poor decisions and a lifestyle drift.

This is why it helps to speak to a financial planner who can help to structure your cash flow, protect maintenance where necessary, and invest any retirement benefits or lump sums wisely.

Do not approach divorce as a fight over things. Approach it as the design of your next financial chapter. Slow the process down enough to understand the numbers, the legal regime, the tax consequences and the long-term cash flow. What you sign now may shape the next decade of your life. DM

Kenny Meiring MBA CFP ® is an independent financial adviser. Contact him at 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to kenny.meiring@sfpwealth.co.za

This story first appeared in our weekly DM168 newspaper, available countrywide for R35.