You and your spouse were on FIRE. You worked hard at your financial independence with the goal to retire early. You might already be retired right now, living off the dividends of your hard-earned nest egg and passive investments, and with little to no debt. Financially, your marriage was a success. Personally, however, things were far from ideal, and now you and your spouse have made the difficult decision to divorce.
When a FIRE marriage ends, does financial independence end with it? It’s a fact that divorce forces the division of marital assets (and debts) between spouses, and this can result in sleepless nights over your finances. Can your FIRE plan survive this split?
The answer can be YES, as long as you know which decisions in your divorce will be key to safeguarding your financial future.
Here are some tips to keep in mind as you embark on your FIRE divorce.
Negotiate, negotiate, negotiate
Your marriage is ending, but this doesn’t mean that your financial independence is over too. If you’ve been part of the FIRE movement for some time, go back to basics and look at the core goals and practices of FIRE.
- Role play different post-divorce net worth numbers and what it will take to maintain financial independence. Use a financial independence calculator (eg, networthify) to identify how long it will take you to regain FI post-divorce based upon various savings rates, post-divorce investments, withdrawal rates, debts and your spending.
- Use this information to inform your negotiation strategy. Which assets can you “give” on in order to receive more of what you want? For example, could you “give” on jointly owned vehicles, putting these in your ex’s column in the split, in exchange for the fully funded 6-12 month emergency fund you built up? What about trading your equity share in your family home for retaining your investment portfolio?
- If you were the only spouse in the marriage committed to FIRE, you may find it even easier to negotiate those “far off reward” items in your favor.
Do: Value Financial Transparency; Don’t: Hide Assets
Getting the financial settlement of a divorce “right” requires extreme attention to detail in gathering financial records, having accurate investment valuations and proper cost of living records, and being absolutely transparent in carrying out full financial disclosure. When there is fear or panic about “my ex taking all my money,” it can result in greater risk for fudging, low-balling or outright concealing certain aspects of one’s finances, especially if you were the spouse taking care of money issues and financial investments during the marriage. Follow this golden rule of financial disclosure: Don’t hide assets or low ball the worth of assets as these types of missteps can lead to costly penalties when they are discovered. In today’s day and age, even anonymous cryptocurrency can be tracked down, resulting in spouses finding themselves in hot water with the courts.
Diligently analyze your spouse’s financial disclosures too, especially when it comes to cost of living estimates. As a FIRE couple, you have no doubt lived quite frugally for years and your cost of living expenses may be much lower compared to others of a similar net worth. When financial information is exchanged during the divorce process, carefully examine what your spouse lists of usual living expenses. Do these seem accurate or way off base? (As in, are they suddenly claiming a wardrobe allowance of thousands a month when you know they’ve shopped Goodwill for years?)
If alimony is on the table, the spouse who will receive payments may attempt to pad cost-of-living amounts to gain more in payments. The spouse paying alimony could also try to pad their own cost of living expenses to claim less is left over for alimony and payments should be based on this smaller pool of money. If you are in doubt about the accuracy of your spouse’s financial disclosures, a forensic lifestyle audit is a worthy investment to determine real cost of living expenses.
Consider a lump sum alimony payment
Whether you will pay or receive alimony, there are compelling reasons why you should consider lump sum vs. monthly payments and which type will assist you in reaching your FI goals. What you need to know:
- When filing federal income taxes, alimony is taxable income to the payor in any alimony agreement put in place since 2019. If you pay alimony month after month, year after year, will affect your tax bracket for years to come. However, if you pay a lump sum alimony to your ex, you get the tax hit over with in a single year.
- If you receive alimony, you don’t pay taxes on this income, but getting this money in amounts doled out monthly can put a delay on getting back on the FI track. What is better for your bottom line? Receiving a large lump sum that can produce interest to help cover your expenses going forward, or monthly amounts that don’t provide this benefit and/or force you into more years of scrimping and saving to get your nest egg and investments back up to speed?
Alimony is highly negotiable, so do some research and war gaming of finances to see which is better for you. For divorcing FI spouses, a lump sum alimony agreement has the potential to be a win-win, but only if it works for your bigger financial picture.
Before you go the DIY divorce route, consider the hidden costs
The frugal kneejerk reaction of FIRE spouses getting a divorce is often to go the DIY divorce route to save on costs. Is DIY divorce, where you download forms and do all the calculations yourselves, cheaper up front than an attorney-assisted divorce? Yes. However, does DIY divorce leave you open to making HUGE financial errors that are easy to make and extremely costly (or impossible) to change? Yes and yes. Read this DIY divorce horror story for real life examples of DIY divorce financial mistakes.
As you strategize for your divorce, factor in working with a divorce attorney as your best bet for safeguarding your financial future. A highly skilled family law attorney will be able to steer you away from mistakes and steer you towards cost-saving measures such as settling out of court through collaborative methods, saving both money and time over pricey divorce litigation.
Eliminate remaining debt
If you’re smart about it, divorce can actually become a tool of strengthening your FI and reaching your FIRE goals. Has lingering debt been holding you back from 100% FI? Consider ways you can use your divorce to accomplish this. For example, if you need to liquefy any investment assets, use part of your portion from the proceeds to annihilate old credit card debts and other consumer debts or student loans. If you sell your family home, roll over your part of the equity into a smaller less expensive home to minimize your mortgage or avoid one altogether. In general, exiting your divorce with cash in hand — your hand — gives you the power to invest and start a passive income business and fulfill other FIRE dreams you’ve long wanted to explore.
Rather than being further away from financial independence as you go through the divorce process, with wise decisions, you may find yourself on track to true FI.
Learn more about divorce finances by reading our blog: How to Protect Your Finances In Divorce.
Are you going through a FIRE divorce and have questions about your financial future? Our highly skilled attorney are well-versed in the complex asset portfolios FI spouses commonly accumulate. To get answers and a clear strategy for your next steps, please call us today at 888-888-0919 to schedule an initial consultation.