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Article written by Chris Coulter
The financial and emotional implications of a divorce can be overwhelming. But if you are a spouse who has been a stay-at-home parent for a number of years, that stress can be crippling. It’s vital to have a financial plan in place to ensure that your life will continue, albeit in a much different context. The goods news is creating a detailed plan can be rather liberating if you do it correctly.
These steps can help to ensure that your future, and the future of your family, will remain stable and bright:
1. Expect Your Lifestyle to Change: With your new marital status, you can expect to have a change in your standard of living by at least 25%. This is important to realize as you are establishing a budget.
2. Create a Budget: Some stay-at-home parents may never have needed to create a budget because they were not previously involved with the budgeting or financial planning, or because they did not have any financial restraints to work with. Now is the time to change that. A budget will set the tone for future spending habits and give you a guideline for what you can and cannot afford. Don’t forget that your new budget should address today’s needs – but also tomorrow’s. Allocating expenses for children’s post-secondary school education, retirement planning and future savings need to be considered when creating a budget.
3. Invest in an Annuity: For some people, a lump sum amount of money is a dream come true, however, large sums of cash don’t usually last 10 or 20 years. An annuity is like a self-discipline tool for those who have received a large settlement but need to make it last for a long period of time. As an example, if you receive a $500,000 cash settlement from your spouse, you determine that your monthly budget is $5,000. You can set up an annuity to pay you $5,000 every month until the $500,000 is exhausted (over 9 years). You are continuing to make money on the annuity and it’s a guaranteed contract.*
4. Invest in Yourself: In many cases, there will be a need to go back to work at some point. Many people don’t know this, but you can utilize the Lifelong Learning Plan within your RRSP (similar to the RRSP First Time Homebuyers’ Plan), and access your RRSPs to go back to school and train for your new career.
5. Invest in Your Children: Don’t forget to allocate funds to your children’s future education. Leveraging the Canadian Education Savings Grant portion of an RESP will help you arrive at your goal sooner. Look at reinvesting some or all of your Canada Child Benefit into your child’s future education.
6. Insure Your Financial Future: If your monthly livelihood is dependent upon someone else, ensure that their income is protected in the event of death, disability or critical illness. Life, disability and critical illness insurance can financially safeguard you if something should happen to your ex-spouse.
7. Work with a Trusted Financial Adviser: Very few people know how to plan for their financial future adequately, whether purchasing a home, paying for a child’s university education, or working on a retirement plan. A financial planner can make these goals both manageable and attainable, and put a concrete plan in place. They can also help with debt management, your monthly budget, and creating a financial needs analysis.
Change can be scary with a plan, and even scarier if combined with financial uncertainty. Remember that your current state does not equal your future state. The future, although full of uncertainty, can represent tremendous opportunity for personal growth and development. Surround yourself with people who are positive and who will provide you with the emotional strength and encouragement you need to succeed. Follow as many of the steps above as possible, and you will come to love the transformation that is your new life.
*There’s a taxable portion of an annuity. If it’s a non-registered prescribed annuity, the annual taxable amount is approximately $5,700 for the above example.