Ask Bob: We're Divorced & Dating - How Do We Handle Long-Term Financial Decisions?

A reader is in a committed long-term relationship and wondering how to balance benefits and financial planning since they're both divorced. Divorce expert and financial planner Michelle Petrowski Buonincontri lays out a detailed list of points to ponder.
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Question

I am dating a gentleman who is divorced, as I am. He will get a state pension and he will opt for a joint and survivor annuity payout when he retires with his ex-wife as the survivor. I expect to receive an ex-spouse’s benefit after my ex files for Social Security. The person I'm dating and I don't want to get married because I wouldn't receive his pension (haven't even considered WEP and GPO) and stand to lose my ex-husband’s spousal benefit. Can you poke holes in this plan or is it sound?

Answer

Michelle Petrowski Buonincontri, CFP®, CDFA®, founder of Being Mindful in Divorce, a divorce financial strategist, personal finance coach and mediator, walks our reader through a variety of details to consider.

A couple of things that come to mind that I discuss with clients in a similar committed unmarried relationship. As a divorced women myself in a committed relationship, these are also consideration for me as well. As there is a loss of income as well as valuable privileges/rights when we’re not married, I‘ll separate these into categories and address one at a time so that you can gauge what’s important or relevant in your situation and I won’t assume marriage is out of the question.

Key Areas of Consideration

Emergency fund – Have you determined how much of an emergency fund will be needed to cover 10-12 months’ worth of household expenses for yourself, and as a couple? Will you save for this together or independently? How will you know that your partner has also done his due diligence with figuring this out and setting aside funds?

Don’t forget inflation when estimating expenses, especially over a long period like retirement. Things will cost more as time goes on, so you may need more on an annual basis year-over-year, and this will also affect your annual emergency fund need.

Expenses – How will household or joint expense be determined and paid? Will he cover some, you cover others? Will the contribution to expenses be 50/50, so you are roughly both having the same outlay of money a month? Or are you splitting expense pro-rata based on your income so expense are not more burdensome on the partner with less income?

For example: He brings in $70,000 a year, you bring in $30.000 a year. Total household income is $100,000. He contributes 70% towards expenses and you contribute 30%. Rent/food/utilities etc. = $3000/mo. He contributes $2100/month. You contribute $900/month.

· Will expenses be paid from a joint account that you each contribute to monthly? Or will you each be paying certain expenses/bills from your personal accounts? Will you be listed jointly on utilities?

· How will you each be listed on a lease if you are renting (an apartment, house, storage unit etc.)? You may want to consider each of you having a separate lease with a landlord, so that you are not responsible for the other party’s financial obligation if the other party defaults. Also, be careful of language that states “Joint and several liability” as you are each fully responsible for the full amount owed in this type of contract.

Living-Together Agreement, Cohabitation Agreement, Domestic Partnership

You may want to consider a living-together agreement, cohabitation agreement, or a domestic partnership; these agreements are different and kind of like a pre-nuptial for an unmarried couple. Having a written agreement to outline and communicate needs and expectations can go a long way. Find out what’s available in your state and the state laws governing such agreements. A written agreement can address things such as

· property inherited or received by gift during the relationship

· property bought during the relationship

· expenses, such as food, utilities, and housing

· what will happen to your property if you split up or if one of you dies, and

· a method for resolving any disagreements that later arise out of your living-together contract, such as mediation.

What happens if the agreement is to split expense (50/50 or pro-rata) and he gets sick/disabled or can’t contribute to the household at the same level as previously agreed? If you are now covering a larger portion of expenses to cover his portion of those expenses and he dies, how will you recover those payments you made on his behalf? If you had an agreement, perhaps you address the expense arrangement in writing, and then have him sign a promissory note that says he’ll pay you back those payments made on his behalf for his portion of the expenses, and if he passes away that “loan” can be recovered against his estate.

Income

Income will obviously drop if you break up or he passes away.

· Is there an ability to be a beneficiary on a life insurance policy on your partner, either privately or perhaps at his employer if he’s still working?

· Is he covered by short- or long-term disability insurance at his employer if he’s still working? You wouldn’t want to be stuck paying extra expenses in case he wasn’t able to continue working for some reason.

· Was there a 401(k), 457 plan, 403(b), IRA or another retirement plan that you can be added to as a beneficiary? Many times, when an individual has a pension, they also have one of these other types of retirement savings accounts as well.

Healthcare

The rising costs of health insurance premiums, out of pocket costs or costs incurred due to an unexpected event can be devastating and are one of the largest costs in retirement. Having access to an employer-offered family health-care plan (even contributing to healthcare spending accounts) can reduce taxes paid, and help to defray these costs and minimize the financial risks; all equating to more money in your pocket as a couple. If you don’t get married, see if you can be considered a “domestic partner” and be added to employer health care coverage – as this may save you both some money on premiums.

Social Security

You mentioned Social Security benefits. There are both spousal and widows benefits to be considered.

1. At the basic level, you need to be married 10 years or more to collect on your ex-spouse’s earnings record as a divorced spouse. If you have been married at least 10 years, and you have been divorced for two years or longer and your ex-spouse is eligible for social security retirement or disability benefits (even if he/she is not yet collecting) you can claim a benefit on his record and don’t have to wait for him to file for his benefit. I’m not saying that you should, only that there’s an exception here for folks to be aware of.

2. If this is a relationship in which you might consider marriage, then do some math

· Is the Social Security spousal benefit/income you would receive as an ex-spouse greater under your former spouse or the current partner (if you were to marry this gentleman and receive a spousal benefit under his earning record)?

· Is the Social Security Widow benefit/income you would receive as a Widowed ex-spouse greater under your former spouse or the current partner (if you were to marry this gentleman and receive a Widow’s benefit under his earning record)?

3. If you decided to marry, and later got divorced from this gentleman and weren’t married for 10 years, you could still collect a social security benefit (spousal or widow) based on your former ex-spouse’s record.

This can be a bit complicated, so for more information, see “Everything you need to know about social security and Divorced spousal benefits,” Social Security Benefits for Spouses, and the SSA.gov fact sheet for spouses, to help with your decision.

Estate Planning

Property and inheritance rights are lost when we’re not married and can really affect a retirement plan if our non-marred partner dies and we didn’t plan properly

· Are you on joint accounts? How will you access his money if bills need to be paid if he can’t pay or passes away?

· Consider who will make decisions for you and him. “Next of kin” status isn’t automatically afforded in financial, medical treatment, end of life and financial decisions when you are not married. Take time to make deliberate plans. Do you have:

 - a financial Power of Attorney?

 - a Healthcare Power of Attorney (HCPA)

 - Are you designated as each other’s Healthcare Proxy to make medical decisions for each other?

 - A Healthcare directive or Living will that expresses your end of life wishes? A living will is not the same as a living trust.

See here for an explanation of “Financial Vs. Medical Power of Attorney: What’s the Difference”

· Is there a Will? Inheritance rights are lost if we’re not married. Is there’s a home and one of you would like to allow the other to stay there after your death, if so, how have you planned for that and communicated that to your families? We want to ensure assets & decisions are not inadvertently placed in the hands of the probate court - which may make property decisions not in alignment with what you wanted for each other or your family.

Some states will have documents online to help you like AZ Life Care Planning website, 5 wishes and LegalZoom are additional resources worth investigating

Of course, many of these decisions depend on the level of commitment in the relationship and can change over time as the relationship deepens. Lastly, this is not meant to be an exhaustive list, but rather to spark conversation as a starting point.

Having the right professionals to consult with can make a difference in your long-term financial outlook after divorce. Both the IDFA (Institute for Divorce Financial Analysts) and the ADFP (Association of Divorce Financial Planners) can be resources for finding a CDFA™ (Certified Divorce Financial Analyst) professional to support you after this life transition. Additionally, consulting a Certified Financial Planner for comprehensive advice to model out this scenario can add peace of mind. See www.CFP.net or www.oneconnect.net.

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Email Robert.Powell@maven.io