Every year, around 25,000 divorces take place in South Africa.
Divorce is a time of major change at all levels. New homes need to be found, the mourning of the old relationship needs to happen, and children need to get used to new routines. It is completely understandable that financial planning does not occupy a high priority level.
However, if the financial side is neglected for too long, there can be major repercussions. You need a skilled financial planner to help you recalibrate your finances and reduce your financial risk.
Areas to look at include:
Maintenance cover
What will happen to maintenance payments should the payer:
- Die?
- Become permanently disabled?
- Become ill and cannot work for an extended period?
One can take out insurance on the maintenance payer’s life. This protects the single parent from the risk of the maintenance disappearing should anything happen to the ex-spouse. This can be written into the divorce agreement.
There are products on the market that can pay out a death benefit as a monthly amount till the child reaches an agreed age. This reduces the risk of any lump-sum being spent too quickly and there not being funds to look after the children.
Investment of lump sum proceeds
If the divorce agreement results in a payment of a lump sum, you should use a skilled professional financial planner to calculate your current and ongoing financial needs and invest the lump sum to ensure that these needs are met both now and, in the future.
Pension payout
Spouses are entitled to a payout from their spouse’s pension fund. This needs to be invested correctly in investment portfolios that are appropriate for the lifestage of the divorcee.
Again, this is not something that is seen as a priority at the time of the divorce. The funds are typically put into a default portfolio which may not be the right one for you. This can be an extremely costly mistake when you get to retirement.
If you miss out on 2% of growth each year through being in the wrong portfolio, in 20- or 30-years’ time when you retire, your savings will be significantly less than they could have been. Make the effort and talk to a specialist.
Recalibrate finances
Divorces are costly. Savings will have been used up. Moving onto one salary will have an impact on the longer-term plans.
This requires that a new financial plan be drawn up. You need to stop, breathe, and start again. Do not try and do this on your own. Find a certified financial planner can help ensure that:
- There is sufficient risk cover to look after the children
- The correct medical aid and gap covers are in place
- The correct beneficiaries are noted on your pension fund and any life insurance policies
- The longer-term retirement needs are understood, and longer-term plans are in place to address them.
There are often short term cashflow issues at the time of a divorce and people often do not want to think about the longer term. A decent planner can help quantify the need and assist in prioritizing those issues that are critical and figure out a plan of action to address the longer-term issues in the future.
Divorces are never easy, and you do suffer from decision fatigue because of them. Do not let this get in the way of getting your finances back on track. Speak to a professional financial planner we will help you make wise decisions.
Kenny Meiring MBA CFP ® is an independent financial adviser.
You can contact him on 082 856 0348 or at Financialwellnesscoach.co.za.
