When Terry Hawes meets with newly divorced clients, one thing that often strikes him is how deeply stressed they are about money.
Mr. Hawes, a partner in consulting firm MNP who holds the certified divorce financial analyst (CDFA) designation, says that even after cutting back on living and recreational expenses, divorced people are often hard-pressed to make ends meet – particularly if they opt to stay in their old neighbourhood. Adjusting their expectations to their new financial reality can be painful, and the process of separating their financial needs from their wants can be, for many, depressing.
“The new reality … results in [borrowing money from family members], financial assistance and struggles,” says Mr. Hawes, who is based in Port Moody, part of Metro Vancouver.
About 40 per cent of Canadian marriages will end before their 30th anniversary, with the average marriage duration coming in at just under 14 years, according to the Ottawa-based Vanier Institute of the Family. The financial and emotional devastation that accompany divorce has been well-documented, but at a time when debt levels are at record highs and housing prices have elevated the marital home to unaffordable levels, worries about money are rampant among Canadians.
Divorce is certainly an aggravating factor in the rise of debt stress. According to a recent paper in the Journal of Psychiatric Research, people who are divorced or separated are at greater risk of debt-related stress and psychological distress symptoms.
The paper, Debt Stress, Psychological Distress and Overall Health Among Adults in Ontario, says that such financial stress can affect one’s health, noting people who are separated or divorced are among the groups most likely to experience debt stress. “Results indicated that the odds of poor to fair mental health were greater at higher levels of debt stress,” states the paper.
Lead author Hayley Hamilton, a senior scientist at Toronto’s Centre for Addiction and Mental Health, says her team found that debt stress is associated with more serious mental health problems, such as psychological distress, depression and anxiety.
Ms. Hamilton says divorce can highlight the challenge of finding affordable accommodation. "Do you have the security you would need in order to secure a mortgage? How long would it take you to pay that off, what are the financial worries, how restrictive would that be? All of these things compound and add up. One of the things with stress is it can so easily grow or multiply in time. It’s an important consideration with regard to divorce or separation.”
Jackie Porter, a Mississauga-based financial planner with many divorced clients, says she often meets with people who are not “psychologically or financially prepared” for a divorce. She says many divorced people go from very comfortable lives to struggling to afford basics.
She says many newly single people – especially if they were homemakers – can’t afford to stay in their houses or don’t qualify for mortgages because of recently tightened eligibility requirements. Some people believe that staying in their matrimonial home will be a comfort, but the added financial burden becomes a significant source of stress, she says.
Carolina Billings had been living in a house worth more than $1-million in Markham, Ont., when she got divorced, and quickly realized she needed a major lifestyle change. She was in graduate school at the time, and the child support payment for her son was a bit more than $500 per month. Instead of negotiating a split of their assets she took a $250,000 lump-sum payment, which she used to buy a townhouse.
“I walked away with a fraction of what I was entitled to,” she says, noting that she was eager to end things and worried about the psychological effect on her son if she were to battle her husband for more. “I was extremely stressed. … It manifested as guilt because, even though it was the right thing to do for my son and I, I had broken up our family.”
Ms. Porter encourages married people to maintain independent bank accounts, where they are accumulating their own money, and to be aware of the location of the family’s money and corresponding documentation. Once a split happens, she counsels people to negotiate for the amount they are entitled to, which often includes half of all assets, including investments.
She urges those experiencing divorce-related mental health challenges to enlist a trusted person to help negotiate on their behalf.
Ms. Porter also points out there are tax implications of breaking up, including that the higher earner may lose their eligibility for certain family-related tax credits. "Single people pay more taxes, especially high-income-earning single people who don’t have any deductions." Child-support payments made by the higher-income earner are not tax-deductible, but spousal support payments are deductible. The partner receiving spousal support must claim it as income, which is not the case for child support.
Another nuance to manage when settling a divorce is how long the support will be paid, notes Mr. Hawes. Child support typically ends at 18, while spousal support can be permanent, although the amount is typically reduced at retirement. “You have to do the projections. … What is fair and equitable today may not be fair and equitable five or 10 years from now.”
Mr. Hawes says he advises people who are divorcing to stay in the real estate market if possible, particularly if they live somewhere where prices are rising quickly. Otherwise, he says, they risk being priced out for good. “If you go rent for five years, you probably will never get into the market.” He says many people don’t have the money right away for a down payment, but with focused saving, can buy within a year or so. He urges those people to park their settlement cash somewhere safe – not in risky investments.
“Preserve that capital. Get it into a [guaranteed investment certificate] or something where you won’t lose your money.”
The act of divorcing itself is not without cost, so Mr. Hawes urges people to try to negotiate amicably and rationally – for their family’s sake as well as their financial state. He advocates a cooling-off period in the hopes that both parties will be less emotional and better prepared to be fair. He’s seen ex-couples spend as much as $250,000 on legal and professional fees related to divorce.
“You can blow a vast fortune,” he says. “To me, that’s not rational thinking.”