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Breaking up the Assets is Hard to Do: The Financial Side of Divorce
August 31, 2010
Couples who decide to divorce must deal with the daunting task of dismantling a life that was once a partnership. The emotional upheaval is intense, as both parties must create their own individual lives again.
But an important step in the divorce process is dividing the assets between the two parties. What was once ‘ours’ must now become ‘yours’ and ‘mine,’ and it’s a process that can be painful in its own right. If you are preparing for a divorce, there are important steps you need to take to ensure that the assets are divided properly.
Who should be involved
Let’s start with the obvious answer – lawyers. It’s critical that lawyers are involved, especially when the individuals are in conflict. In addition, many people benefit from enlisting the help of a financial advisor who can help sort out the complexities of splitting joint assets.
Getting started
Sorting through the financial side of a divorce should happen right away. This is important because once the divorce is finalized, making changes to the financial settlement is extremely difficult. Here are some important initial steps:
1) Find out what your joint assets are. Any assets you’ve accumulated while married are joint assets, at least in most states. This includes the obvious -- homes, autos, boats, jewelry – but also includes business interests, retirement savings, investments, cash, bank accounts, and anything of value like antiques. Make sure all asset values are in writing.
2) Do the same with liabilities. Any debt including mortgages, car or boat loans, tax liabilities and/or penalties should be disclosed and tracked.
3) Create a new budget. Each party should determine their financial needs for their life after the divorce. Don’t overlook items that were once shared like health or life insurance premiums. Use your best estimates if actual costs are unknown. This is an important step that will influence the way in which the assets are divided.
4) Explore what the long-term picture looks like. What will be your lifestyle beyond the divorce proceedings? How will the divorce affect income? Will the former stay-at-home spouse get a job? If so, what is the salary and benefits? Where do child support and alimony fit into both individuals’ scenario? It is worth thinking about these issues now, even if the actual numbers are only estimates.
Your changing insurance needs
When couples split, each person’s insurance needs change immediately. Whether you carried the lion’s share of insurance policies, or you were the beneficiary of your spouse’s policies, you need to make changes.
· Health insurance. If you will no longer be covered by your spouse’s health insurance, you will need to find your own plan, either through an employer or another source. You will need to work out which of you will carry health insurance for your children as well.
· Life insurance. You may no longer want to list your former spouse as a beneficiary of a life insurance policy; on the other hand, if you were the beneficiary and will not be going forward, you will also need to explore your own life insurance needs. Individuals who will be receiving alimony or child support payments might also consider taking out a life insurance policy on their former spouse to ensure they can continue to receive that money if the ex-spouse passes away.
· Other insurance needs. Long-term care and disability insurance may be more important to both parties, now that each is running a household solo. Auto and home insurance will now be up to each individual as well, so be sure to find the right policy for your new situation.
· Other documents. You will also need to update key documents like wills and living wills. They can be rewritten or you can create entirely new ones that reflect both your wishes and the current state of your household.
Your financial know-how
If your spouse always handled the checkbook and the budget, you’ll need a crash course in the basics – and soon. Take a class in basic money management, work out a budget for your new life and (here’s the hard part) stick to it. As you embark on your own separate path, this is a skill you will need, and you won’t have anyone else to handle it for you.
A realistic perspective on risk
August 27, 2010
How much risk are you as an investor willing to accept? This is one of the most important factors that can affect the way you structure your portfolio and your overall financial plan. Yet it is also one of the most difficult to quantify. There is no universally accepted way of accurately measuring an investor’s risk tolerance. A number of factors come into play, including the investment and economic environment you are dealing with at the moment.
For example, consider how you might have answered a question about your level of risk tolerance during the record bull market of the 1990s. Given that the market rarely experienced an extended down period during that decade, many investors were comfortable implementing an investment strategy that was quite aggressive. They were convinced there was little chance that the stock market would suffer a significant setback.
Things look a lot different today. We’ve had two notable bear markets in less than a decade. The Standard & Poor’s 500 stock index (an unmanaged index of stocks) lost 49% from 2000 to 2002, and after recovering and reaching new highs, lost another 57% from late 2007 to early 2009. This experience has likely caused you to reconsider how much risk you are willing to accept. Today’s investor truly understands what it means to deal with investment risk. It isn’t just a theory like it was during the 1990s, but a real possibility. Facing that reality, investors know they have to take risk more seriously, and try to determine their appropriate risk tolerance level.
Assessing your own risk profile
Here are some ideas to keep in mind as you define your own views about investment risk:
• Set proper expectations. It’s important to accept that stock investments will be subject to periodic volatility. The reward potential of investing in future growth of global businesses remains strong, but the path to wealth is not always smooth. Prepare yourself for the fact that it will get bumpy along the way.
• Try to maintain a consistent investment behavior. Take an objective view of your investment goals. Combine that with an honest appraisal of how much fluctuation you are willing to accept with your portfolio. Invest accordingly and stick with that strategy. Don’t let short-term swings and day-to-day headlines sway your long-range resolve as an investor.
• Recognize that time is one of the biggest determinants of risk tolerance. Investors with a decade or more to reach their goal have the luxury of riding out market downturns or even extended flat or negative markets. Those who expect to reach their goals in the next few years need to take steps to protect against the impact of market volatility. Your risk tolerance level may need to be adjusted as you grow older.
• Trust your instincts. If you have trouble sleeping at night because of concerns about the safety of your investments, it may be time for a change. But be sure that any decisions you make align with your ultimate financial goals.
• Explore ways to stay invested in the market while mitigating some of the risk associated with it. Dollar-cost averaging into investments rather than investing lump sums at one time is one option. Maintaining proper diversification across a variety of asset classes is another. Products (such as variable annuities) that allow you to continue to participate in the market’s growth potential while locking in gains are also worth considering.
Remember other risks
While the risk of losing money in an investment is always foremost in your mind, don’t overlook other potential risks. Among them:
• Purchasing power risk – inflation is always a factor. Simply stated, your money won’t be worth as much in the future as it is today. It is important to own investments that can help your asset base at least keep pace with inflation, and hopefully grow faster than the cost of living.
• Opportunity risk – missing out on potential profits in a specific investment by choosing to have your money in a “safe” place or being unable to access money for a period of time in order to put it to work in a more effective way.
• Interest rate risk – fixed income instruments such as bonds carry their own risks, one of them being that if interest rates rise, bond values will decline. Given that yields are currently at historically low levels, this risk may be more significant today.
Managing risk in an effective way will play a role in determining your ultimate investment success. It is an issue to take seriously and to deal with honestly.
Even Countries Need to Care About Credit Ratings
August 11, 2010
There’s been plenty of attention paid lately to the battered state of consumer credit. But what happens when nations get low marks on their credit report cards? Like consumers, countries can get into a trouble when their ability to meet their financial obligations comes under question.
Just as there are three main credit agencies that measure and report consumer credit, there are three leading global agencies that assign and report sovereign credit ratings: Moody’s Investor Service, Standard & Poor’s and Fitch, Inc. Each agency uses its own scale to provide investors with a “credit bond rating,” which is an assessment of a nation’s ability to repay debt issues (typically bonds). High credit bond ratings help reassure investors, while low ratings turn investing into a riskier business.
Consider Ireland, for example. Only a few years ago, Ireland’s economy was booming. But over the past year, as jobs have declined and tax revenues have dropped, Ireland’s ratio of debt-to-gross domestic product (GDP) has snowballed. As a result, the government has been forced to cut wages and raise taxes, which in turn is stunting growth. Because of Ireland’s weakened economic state, all three agencies have given the country lower marks, with Moody’s Investor Service most recently downgrading Ireland’s credit rating from Aa1 to Aa2. The most significant impact of Ireland’s downward grading is the effect it will have on the country’s ability to take on more debt. Essentially, borrowing money will be more expensive, making it even more challenging for the struggling nation to right itself financially.
Greece provides another cautionary example of financial reversal at the national level. Recently Moody’s downgraded the country’s bond credit rating to junk status. Such a low rating can scare off investors by suggesting that Greece’s instability may affect the country’s ongoing ability to repay debt.
Even the United States, which currently enjoys top credit bond ratings from all three agencies, is at risk of earning lower “grades” due to our nation’s trillion-dollar budget deficit. If interest on our national debt eventually exceeds the ability of our government and economy to grow and afford debt repayments (while also paying for federal programs), we could find ourselves in the same bind as Ireland or (gasp) Greece.
There are two lessons to be learned from this discussion about sovereign credit ratings. Number one: Safeguard your credit on a personal level to remain solvent and avoid excessive debt. Number two: Pay attention to credit bond ratings if you decide to invest in international markets. A qualified financial advisor can help you find ways to strengthen your own personal credit profile and invest according to your tolerance for risk.
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This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial.
Financial planning services and investments offered through Ameriprise Financial Services, Inc., Member FINRA & SIPC.
©2009 Ameriprise Financial, Inc. All rights reserved.
 Robert A. Powell, CFP®, CMFC®
Financial Advisor | Registered Principal
CERTIFIED FINANCIAL PLANNER™ practitioner
Ameriprise Financial, Inc.
2 Pittsburgh Circle
Ellwood City PA 16117
Phone 724-758-7112
Phone 724-752-5252
http://www.ameripriseadvisors.com/robert.a.powell/
Fax 724-758-2669
This communication is published in the United States for residents of
Pennsylvania, Ohio, West Virginia, Maryland, Florida, Indiana, Nevada,
Georgia and California; and this advisor is licensed in the states of
Pennsylvania, Ohio, West Virginia, Maryland, Florida, Indiana, Nevada,
Georgia and California.
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