During this time of bear market territory, high inflation, stock market volatility, and the threat of a recession, your money simply won’t go as far. You might wonder how these volatile market conditions impact your divorce and what to consider as you negotiate the financials of your decree.
In this post, we address how to respond to the impact of challenging market conditions in your divorce.
Who is most impacted by these market conditions?
Everyone is impacted on some level when the economy is in a downturn. However, individuals with short-term (within 12 to 24 months) money needs that will require withdrawals from investment or retirement accounts to pay for things, such as a new house, moving costs, furnishing a new home, a new car, attorney payments in the divorce, and more, will be more impacted by the current market conditions. Other individuals who will disproportionately feel the impact of the current economy in their divorce include:
- People who have divorce agreements that require the sale of stock to divide assets (try to avoid creating this type of agreement if at all possible in the first place unless taxes are addressed in your agreement)
- Individuals who exchange one type of asset, such as home equity, for a different type of asset, such as funds in a retirement account or pension payments.
If you don’t fall into one of the groups above, you are in luck and you’ll be less impacted long-term if you can leave your money in the market until it rebounds. It could rebound in 8 months like the market fall in 2020 or in 5.5 years like during the great financial crisis. As scary as it can feel to lose 34.8% like the Dow Jones Industrial Average (DJIA) did in spring 2020 it’s important to remember that it gained 91.9% from March 2020 low to the high in January 2022.
Remember, that you only really lose money in the market when you sell long-term investments while they are experiencing temporary setbacks. As a general rule of thumb, the longer your money can stay invested without selling, the better off you are.
When are market losses normal?
There are different investment strategies to consider for short and long-term needs. Assets that are intended to provide for future long-term needs, such as retirement, should be invested with an appropriate level of risk. You should expect periodic losses over time in order to achieve higher levels of growth. Selling assets that are invested and intended for future goals, such as retirement, during periods of market corrections, can be detrimental to long-term strategies.
Because selling assets that have incurred market losses is not ideal, make sure you have exhausted and considered all other financial possibilities to meet your financial needs before doing this. This includes budget modifications, employment opportunities, payroll tax withholding modifications (if appropriate), loans against your 401K or home, or other available loans (if a loan works within your future cash flow).
What does this mean for my divorce?
In your divorce, the level in which different assets are changing in value should be taken into consideration if assets are being swapped. For example, if you agree to keep a higher amount of home equity in exchange for retirement assets, it’s important to understand possible differences in future growth and/or loss potential. Taxes should also be considered as it can skew the end results. If you have to pay 30% taxes on funds coming out of an IRA versus little to no taxes on equity from the primary residence, what looks like a dollar-for-dollar exchange on the surface may be considerably lopsided.
During and after your divorce, review the level of risk associated with your accounts and investments with your financial advisor to make sure it is appropriate for you and your future situation.
What can you do to protect your assets?
If you must sell assets, and you have exhausted all alternatives, make sure to work with your CDFA or financial advisor to understand the best strategy to do so. He or she can advise you on where withdrawals are more efficient by reviewing the accounts and investments available. Don’t forget to consider tax implications and understand if any tax saving strategies are possible.
If you are going through a divorce, create a decree that leaves your money invested in the market if you don’t need it right now to protect your assets. Avoid selling during market downturns like we are experiencing now and instead, split the shares in a way that doesn’t require you to sell them. This can usually be achieved by transferring assets, rather than selling.
Lastly, if you received or will receive a lump sum of money in your divorce, consult with a financial expert about whether investing in the stock market as a long-term strategy is a good fit for your needs. Based on your unique situation, this can be a great time to invest to meet future financial goals.
At A.M. Financial, Amy Mahlen, CFP®, CDFA® is a qualified professional with over 17 years of experience who can help you navigate questions you have around current market conditions and your divorce. Contact us to schedule a free consultation and learn how we help clients like you understand financial options in challenging times like these.
Divorce transition/financial planning services offered by A.M. Financial. Investment advisory services offered through WealthSource Partners, LLC (“WSP”). A.M. Financial and WSP are independent and unaffiliated entities. All investments include the risk of loss and nothing herein should be construed as a guarantee of any specific outcome or profit. Past performance is no guarantee of future results. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The statements and opinions expressed are those of A.M. Financial and Amy Mahlen and do not necessarily represent the views and/or opinions of WSP or any other associated or affiliated person of WSP. Furthermore, the statements and opinions expressed are for informational and educational purposes only and should not be construed as legal, tax, accounting or investment advice. All statements and opinions are current only as of the time made and are subject to change without notice.