Beware of accepting a lump sum payment in a divorce

Divorcing Pennsylvania might be tempted to accept a lump-sum payment for their share of a family house or other real property, or from other property division proceeds. Yet that payment option might create a false sense of security, as a recent financial commentator reminds us.

The danger is that a sizable payment from a divorce proceeding might discourage long-term planning. However, many divorce attorneys recommend planning for at least 20 years of retirement at about 80% of one’s pre-retirement savings. From that perspective, even a six-figure payoff from a divorce settlement agreement might not satisfy projected retirement needs.

Consequently, it might be best for a divorced individual to pretend like that amount isn’t in their savings account. Instead of dipping into any divorce proceeds, an individual could reinvest those funds in a variety of securities, such as Individual Retirement Accounts, certificates of deposit, target retirement funds, and bonds. Part of such a payment could also be set aside to start paying for long-term care insurance.

To avoid turning to savings, a newly divorced individual might try a new budget. Adhering to a budget might help ease the transition and avoid unexpected financial obstacles. For example, without the tax benefit of joint filing status, an individual might be surprised by his or her new tax obligations. In addition, a household of one will no longer benefit from economies of scale, such as carpooling, shared groceries and utility bills, not to mention rental expenses or real estate taxes.

Initially, a budgeting strategy might mean using a cash budget, instead of accruing debts with credit cards. A divorce attorney might also have proactive strategies to help estimate such cash streams before a divorce decree has been finalized.

Source: foxbusiness.com, “How to Move on Financially After Divorce,” Dave Ramsey, April 30, 2013