There's never a perfect time to call it quits on a relationship. Divorce, a major life event right up there with buying a house, having a baby, and, yes, getting married in the first place, is one of the biggest hits a pocketbook will ever take. According to an Investors Group survey, many Canadians are unprepared for the financial fallout. Thirty-five per cent had to go into debt and 27 per cent sold or redeemed investments.
"If you look at the basic math, you're part of a couple with expenses and two incomes. When you divorce, you're splitting your income in half, but not your expenses. Unless you change your lifestyle, it can be devastating," says Perry Quinton, vice-president, marketing, at the Investor Education Fund in Toronto.
So what's the secret to getting through a divorce with sanity and a financial portfolio intact? Is it possible to not only maintain some savings and investments, but grow them? Take divorce in stages and plan accordingly, the experts say.
Stage 1 – Pre-divorce
Not everyone knows that their divorce is imminent, but if it's a forgone conclusion, there is planning you can do, Ms. Quinton says. Before writing that "Dear John" letter, take some time to clean house and know what assets you have. Pull out RRSP statements. Look at insurance and pension plan material too. At the same time, don't get too hung up on retirement funds quite yet. It's more important to figure out how much money you'll have access to in the short term.
"Settlements take time to wind through the system. You may need money. Your immediate concern isn't your investments," Ms. Quinton says.
But it is the time to check your credit rating with Equifax and TransUnion, as a poor rating will have an impact on your borrowing rate. The more interest you pay, the less you have left over to invest in your RRSP eventually.
Andrew Sherbin, an Edward Jones adviser in Toronto, says he encourages clients who seem to be on the brink of separation or divorce to come in and look at their financial plan together and take stock. Of course, not every bickering couple is civil. In that case, it's still a good idea to come in solo.
"Your adviser is bound to confidentiality. If you come in on your own, your adviser will keep that confidential," he says.
Stage 2 – Divorce
Think of divorce as pushing the reset button on your financial life. Everything is about to change.
It's also the time to start setting new financial goals, Ms. Quinton says. What's important to you? Retiring at 60? Travelling six months of the year now that the kids are away at school and you have no couch-hugging spouse to hold you back? Understanding what you want will have an impact on how you invest over the next few years.
Divorce is not the time to be rash, though, says Judy Byle-Jones, a certified divorce financial analyst in Toronto. Although her client might come out of it with a cheque for $250,000 in hand, it's a good idea to hire financial experts – planners and accountants – who understand the long-term consequences of investing that money. In the meantime, stick it in a safe, liquid vehicle such as a high-interest savings account or a guaranteed investment certificate (GIC). Ms. Byle-Jones often prefers insurance company GICs, which can be drawn from even before the maturity date.
"It's like death. When someone dies, you don't want the widow to sell the house overnight and move," she says.
Hiring financial expertise at this stage is especially important if there are pension funds to split. Not only are pensions complicated, how they're divided can have different consequences for each person. In some provinces a pension is paid out to an ex-spouse before retirement – not great when inflation rises – in others, a portion can be paid after retirement.
Stage 3 – Post-Divorce
The dust has cleared, the papers are signed and the lawyers are paid. It's time to invest whatever is left over or start a portfolio from scratch.
Finding the sweet spot in which those funds are perfectly balanced between safe investments and riskier ones that offer a chance of a high return, is no easy thing. On one hand, retirement may be on the horizon and playing it safe might make sense. With no spouse to lean on in the golden years, sticking it all in a GIC or money market account just seems prudent, right?
On the other hand, doesn't it make sense to sink money in high-risk, high-reward investments to make up for lost time? Real estate speculation, hedge funds and emerging markets could seem like a good idea.
For the record, women are more likely to invest a larger percentage of their portfolio in stocks during marriage and pull them out after divorce. Men, however, take more financial investment risks once their marriage has ended, according to a 2011 report from business and economics schools in Europe.
Ms. Quinton says she prefers to stick with the 110-per-cent formula for everyone, in which a person subtracts their age from 110 to determine the equity-fixed income split. For instance, a 40-year-old would invest 70 per cent in higher-risk stocks and bonds and 30 per cent in fixed income assets such as GICs.
"It's not a matter of saying, 'I have to pick one of these investments.' It's about, 'I have to pick a selection of these so I can get the return I'm after,'" Ms. Quinton says. "I would hope that five years after a divorce, you have a plan and things are starting to work for you."