Little-Known Financial Benefits of Divorce | Personal Finance

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More than a third of partnered or wedded couples say money causes the most stress in their relationships, according to a 2018 survey of more than 1,400 Americans conducted by The Harris Poll on behalf of Ally Bank. For some, money woes could cause the couple to go from wedded bliss to divorce court.

“We all know money is one of the main sources of (marital) strife,” says Dan Hill, certified financial planner and president of Hill Wealth Strategies in Richmond, Virginia.

Divorce can bring its own financial worries as newly single people may be left with less income to cover the bills, but it’s not all bad news. Divorcees may find these seven silver linings to their new life:

  • Easier budgeting and greater control over money.
  • Early access to a retirement fund, penalty-free.
  • Potentially better investment returns.
  • More college financial aid for the kids.
  • Social Security perks for older divorcees.
  • Opportunity to reset financial priorities.
  • A better bottom line.

Easier Budgeting and Greater Control Over Money

The end of a marriage can mean the end of fights over money. There is no more struggle over which categories get priority in the budget; no more evenings spent cajoling or pleading with a spouse to rein in spending. “On the other side of divorce, there can be some freedom from these financial disputes,” says Elijah Kovar, partner with Great Waters Financial in Minneapolis.

People who previously had spendthrift spouses may find they are now able to build up savings and contribute more to retirement funds. What’s more, they can shift money to their own personal goals, whether that be paying off debt, traveling more or something else.

Early Access to a Retirement Fund, Penalty-Free

A divorce is one of the few times a person can pull money out of a retirement account early and not pay an early withdrawal penalty. When an agreement known as a qualified domestic relations order is reached as part of a divorce, it allows for an early withdrawal from the account. This money is exempt from the typical 10% penalty assessed to those younger than age 59 1/2, although income tax still needs to be paid if the money is not rolled into an IRA.

Cashing out part of a retirement account can be a risky move, but it gives the newly divorced some options they may not otherwise have. Still, Hill urges caution in how that money is used. “That is for retirement, not for a new car or a swimming pool or something like that,” he says.

Potentially Better Investment Returns

Divorce could mean better investment returns, at least for women, says Mela Garber, tax leader at Anchin Private Client in New York City. “Men usually take a more aggressive approach to investments and take more risks,” she says.

It’s possible divorced women who are managing their own portfolio may have weathered the current tumultuous year better than those with husbands calling the investment shots. “In a market depressed by a global pandemic, those with a conservative approach and sensible asset allocations may not have had cause for panic or selling investments in a down market,” Garber says.

Studies, such as a 2017 analysis by Fidelity Investments, have found women were less likely to fully invest in equities and earned marginally better gains than men. After a divorce, women have the opportunity to take over their own retirement planning, which could be a financial positive in the long run.

More College Financial Aid for the Kids

Divorce can be difficult for children, but there is one place where they come out ahead: college financial aid. The Free Application for Federal Student Aid only requires financial information from the custodial parent, rather than both parents. However, child support and alimony received from the non-custodial parent must be included on the FAFSA.

“With divorce, it lowers your income, and it could put your child in a better place for financial aid,” Hill says. Additional financial aid is a little-known benefit of divorce, but one that is significant.

Social Security Perks for Older Divorcees

Divorced spouses may be eligible to file for Social Security spousal benefits at retirement. You’re entitled to these benefits if you were married to your spouse for at least 10 years, and he or she has reached age 62. While a married spouse must wait for their husband or wife to claim benefits to receive spousal checks, that’s not the case for divorcees.

“When divorced, you don’t have to wait until your ex turns on Social Security,” Kovar says. What’s more, claiming spousal benefits won’t impact your ex’s monthly payment or that of his or her current spouse, if remarried.

Opportunity to Reset Financial Priorities

While people are sometimes resentful of lifestyle changes necessitated by divorce, finance experts say the opportunity to rethink priorities and start fresh can be a positive. Even major adjustments, like giving up a family home, can be beneficial in the long run.

“Sometimes it’s financially better to have a smaller house or apartment,” Garber says. She notes large properties can come with significant maintenance costs that can negatively impact a person’s cash flow. “Using a divorce as a reset and downsizing to a home that can be more comfortably afforded may be worth considering,” she suggests.

A Better Bottom Line

Divorce doesn’t have to mean a depleted bank account. Even on a lower income, divorced people can build wealth by making smart use of their resources. “You could start over fresh and create your own strategic game plan,” Hill says.

The reality is not everyone’s financial situation will improve with divorce, but some people are surprised to learn that it does. Getting a divorce isn’t something to rush into, but if you find yourself in the midst of a crumbling marriage, don’t despair. You may still come out ahead thanks to these little-known financial benefits of divorce.



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