Post Divorce Investment Planning

Post Divorce Investment Planning

By: Martin M. Shenkman, CPA, MBA, JD

The following is a summary of an audio clip by Martin M. Shenkman entitled, "Post Divorce Investment Planning."  To listen to the full audio version, go to

One of most common issues with a client that is going through a divorce is that he or she becomes so sick of paying lawyers, accountants, and other professional fees, that they do not want to deal with more financial matters. However, it is imperative that they deal with a financial plan, because divorce changes everything, from taxes, to finances, to investments. New residences, new insurance, change of beneficiaries, and different taxes are just a few of the plethora of ways that a divorcees financial situation changes.

The first step is to create some kind of financial plan. Start from scratch. What is your client’s budget? What are their cash needs? Get a sense of what kind of expenditures your client will have. Then find out what income sources they have. Compare the cash flow coming in versus the cash flow going out. Is the client financially viable? Finally, discuss what types of assets (house, mortgage, etc) and what kind of liabilities your client has. Are they in reasonable balance? Is there debt? Is there a settlement? A pool of capital to meet cash flow needs?A woman with no work experience and no job gets divorced. She should have assets after the divorce, and now that asset base will be pressed to generate income. Otherwise, she may have to go get a job.

A major aspect of investment planning is one's willingness to take risk. If your client has a lot of income, it is an easy situation. In most cases, it is not that simple. You cannot use static calculations when creating cash flow chart, especially when dealing with a recent divorcee, because usually there are time fluctuations. For example, alimony may end in 10 years, or child support may only last until the child turns eighteen. You must prepare a detailed long-term budget. No one post-divorce wants to think about this stuff because it is a headache, but it is vital. If you do not create a budget, then how do you no what to invest?

Once you have a long term cash chart, evaluate the risk. One’s perception of risk tolerance when they are happily married and things are set is much different than a recent divorcee’s perception when things are unstable. When married, your client may have been too risky, but it was okay, because together they had enough cash flow and reserves. They may have been too conservative, but again, it was okay because of the big cash flow. Now, your client must be less risk tolerant because their life is less secure. But do not be risk averse either, because if you only look at bonds and accounts, you will lose on returns. The worst thing to do is to invest in an inflexible, locked in type of investment. It can be very damaging because you will not be able to generate more cash flow to help your living if your investments are flat. Safe investments like annuities, which pay a flat fee every year, will make your client feel more comfortable, but it is not the best way to go about investments.Real estate investment trusts, for example, have higher yields, and fluctuate in values. If your client is risk averse, then they will not generate income.

Do a year by year projection. Your client will see that what they think is conservative is guaranteeing them financial disaster.

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