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Tracy Stewart, CPA

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Peace of mind through financial clarity.

Six Steps to Post-Divorce Health Insurance Coverage

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Many of my clients in Houston and College Station are facing a health insurance answer during their divorce. They are unemployed and rely on their soon-to-be-ex spouse for health insurance coverage. What to do if you are in that situation?

  1. Find out if COBRA coverage is available under your spouse’s employer.
  2. In Texas, there are two kinds of COBRA, federal and state. The former offers 36 months of coverage after divorce while the latter offers 18 months. Find out which one is applicable to your situation.
  3. Get a quote on your cost of COBRA coverage from the employer.
  4. Seek quotes on individual policies from an independent health insurance advisor. (If you need a referral in Houston, send me an email at stewart@texasdivorcecpa.com.)
  5. Compare the coverage and costs of the COBRA and the individual policies.
  6. Be very careful with your timing when changing health insurance coverage from your current coverage to either COBRA or individual policy. Do not have even a day of lapse.

Most people want to put off this project. It seems intimidating. Break it down into these six steps. I cannot emphasize enough how important this issue is for your future financial security.

Will Divorce Ruin your Retirement Plans?

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Is your divorce going to postpone your retirement? Are you going to have to give up your dreams of relaxation or travel?

In College Station and Houston, stalled retirement plans are common in the list of divorce financial concerns. Your spouse is trying to get all the IRAs. Your spouse won’t share the pension. Even if you could get your spouse to listen to you and agree to share, half the nest egg might not be enough for your retirement.

You can use an retirement shortfall calculator to project when you will be able to retire. (You can also find these calculator links on my blog under Website Links.)

Tips for using the calculator:

  • Before you start popping numbers in the boxes, first read the “Definitions”. They really do matter.
  • Rates of return – choosing the number for this box is like using a crystal ball. I recommend that you fill in all the other boxes first and then work on this one. First put in 2% and see the result. Then put in 4% and see how the result changes. Take it up to 8%. It looks better there, doesn’t it? Actually getting your estimated rate of return in real life is a whole different matter.
  • Federal tax rate – this is your “marginal” tax rate, the rate of tax on your highest taxed dollar. Calculate that with a Marginal Tax Rate Calculator.
  • Number of years in retirement – assume you will live 10 years longer than the age of your longest living parent or grandparent or age 95.
  • Expected inflation rate – use 3.0% or use the default of 3.1%.

 

Warning:  Many people avoid thinking about retirement. Don’t do that. We see lots of articles about inadequate retirement savings in many households. Divorce can make this situation worse. Reverse that trend by educating yourself now.

 

Collaborative Divorce: Most Common Mistake Men Make

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It’s the “I don’t need to do that” guy thing. If you have been making more money than your wife, you are particularly prone to this mistake.

In collaborative divorces in College Station and Houston, we look at post divorce cash needs to help us see options for splitting investments, property, etc. Wives are fine with listing their expenses. They want to show their husbands that their needs are authentic and accurate. These husbands are glad to see that I am going to show their wives – in black and white – that they can’t keep up the spending level.

You guys don’t feel you need to do a budget. You know how much you make. Your personal spending needs are modest. She’s the one who has been spending all the money. She needs the budgeting, not you.

Bingo. There’s the mistake. You need to let her see your living expenses. They may be modest, but they are not as modest as you think. In my experience, people consistently and reliably underestimate their expenses by at least 50%, many times 100%.

I worked with a couple a few years ago. The husband wanted me to work with his wife on her expenses. He told his attorney we didn’t need to look at his expenses. He said he made enough money that he was going to be just fine. He said he had modest expenses. We got well into the collaborative divorce process when he started to put his own numbers on a spreadsheet. He stayed awake that night thinking that he was offering a settlement he couldn’t afford.

The next morning, I showed him that he wasn’t worried enough. He was underestimating his living expenses. The divorce went on pause while I nailed down his true expenses. He backed off his settlement offer. You can imagine how well that went over with his wife and her attorney.  After all, he had been saying for months that his expenses were modest. His mistake and the aftermath of it slowed down that divorce by about three months.

Guys, you need to show your living expenses early in the collaborative divorce process. You need to show, in black and white, that you are not an endlessly deep pocket. Listing accurate living expense is time consuming and boring. If you don’t want to do it yourself, let your financial neutral do it. Be accurate. Be honest. Don’t guess.

 

Six Tips to Figure Out Your Cash Needs in Divorce

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As a divorce CPA in College Station and Houston, I often help clients estimate their cash flow needs for their new normal life after divorce. When I do this, it is accurate. (But, of course, you would expect that from a CPA!) When they create their own budget, it is often wrong.

Here are some tips to correctly figure out your cash flow needs whether during or after your divorce or even if you are not getting a divorce.

#1 Create a list of 12 months of expenses. You can get the number for monthly expenses by dividing that by 12. Always start with a whole year to capture everything.

#2  Your list needs to include expenses that repeat every month, items that repeat only a few times a year, items that occur only once a year and  items that occur only once every few years.

#3  Get copies an entire year’s worth of all your bank statements and credit cards. Use every item to add up your expenses in various categories.  This is a long and tedious task. But it results in the most accurate information.

#4  If tip #3 made you shout “No Way!” then take the dangerous short cut and use 3 months of statements. But know your risks. You will multiply your monthly expenses by 4 to get a full year. Watch out for those twice a year expenses that fall into those 3 months you chose. Don’t multiply them by 4. I had a client who did that and her budget ended up way, way too high.

#5  If you use less than 12 months of data, comb through your statements and find the expenses that did not fall into those 3 months you chose. Add those missing costs in.

#6  Remember to budget an amount for monthly savings. Stuff breaks, stuff falls apart. You will need that savings to avoid charging car repairs on your credit cards.

I have created a good spreadsheet for this exercise. If you want a copy, send me an email with the words “Budget Spreadsheet” in the subject line. I’ll send you one – free.

How to Avoid Surprise Divorce Attorney Costs

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My colleague, Faith Wilson, MA, LPC (Licensed Professional Counselor) is a therapist who sees a ton of people who are thinking about divorce. Faith covers the emotional struggle while I cover the divorce financial advice. We both work in Houston and Bryan / College Station.

Faith’s clients ask her for names of divorce attorneys. She only gives them names of attorneys she knows and trusts. She explains that divorce costs depend upon the individual circumstances and there is no way to predict the eventual cost.  So, what do some of these clients do? They ignore her advice and go out and hire the cheapest attorney they can find.

In their next therapy session, they tell Faith, “Hey! I found a divorce lawyer who says it’s only going to cost me $1,500.” Seems these clients paid a $1,500 retainer and either weren’t listening closely enough to the divorce attorney or were told that their initial retainer will cover the entire divorce cost.

Fast-forward some months. In their therapy session they complain to Faith, “Hey! My divorce lawyer says I have to pay more money!” Surprise. Surprise.

Don’t ever think that your initial retainer will cover the entire cost of your divorce. If it does, you are reeeeally lucky or you paid a huge retainer.

What to do?  Interview two or three divorce lawyers before hiring one. Listen carefully to the divorce attorney you are interviewing. Ask what the total fees will be.  The honest answer is, “it depends.” Then ask about typical things that will cost you to have to pay more during your divorce. Find out what situations or actions might cause these things to happen.

Seek out attorneys who will clearly explain how divorce attorney fees work. Read their website and ask questions.  This is one of the first opportunities you will have in your divorce process to expand your financial knowledge.

Divorce on the Cheap

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There is a great article in the Wall Street Journal about how to divorce without laying out a fortune in the process.  Writer Mary Pilon describes cost factors of divorce and ways to keep your costs down from do-it-yourself to collaborative divorce.

Based on my experience in Bryan/College Station and Houston, the least expensive divorce is done by striking an agreement between the two of you and taking it to an attorney to write up the necessary documents. If you are having trouble getting your spouse to agree on things or you want to be sure you are making smart decisions, try the ala carte menu method. Get an hour or two with divorce professionals who are not attorneys.

Divorce CPA – Connect with a divorce CPA for a short consultation. Lay out your financial situation and ask for suggestions on property division. Ask for tips how to do the actual division – the steps to change ownership of investments, retirement accounts, etc. You can get this done online or in person. CPAs charge less than attorneys and know more about the financial issues and details.

Divorce Parenting Coordinator – Find a Parenting Coordinator to consult with if you and your spouse cannot agree on how to share your children. Parenting Coordinators charge less than attorneys and have more experience in advising families in divorce.

If you want names of divorce CPAs or Parenting Coordinators, contact me. If you are in the Bryan/College Station or Houston area, I can direct you to local specialists and even an attorney who just writes up the documents but stays out of the courtroom.