Post Divorce Next Steps

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Topic Author
infromed
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Joined: Fri Apr 02, 2010 9:06 am

Post Divorce Next Steps

Post by infromed »

Hi all,

I recently went through a divorce. It was a pretty tough experience and I am now looking ahead to try to build security for me and the kids. I am a 45YO male and have two kids (8 and 6). I recently got a new consulting opportunity and expect to see my income increase, maybe substantially (isn't it funny how one door closes and another opens). I expect my compensation to be $200K/annually or possibly more. I am renting an apartment with the kids, have maxed my IRA for the year, and have significant equity in a rental house (which cash flows about $800/month). I may want to buy a house in the next year or two. I would like to keep a liquid emergency fund and possibly save for a house over the next year or two. I am paying alimony but it's manageable. If I live below my means, I think I will be able to save a considerable amount of my compensation. I lost a lot in the divorce and have about $200K in tax deferred accounts. If possible, I would like to retire by 55. I guess there are a few things I am wondering about:

-Should I keep new money earned in cash over the next year or two with a goal of paying off a large chunk of a new house, and lowering my future mortgage payments?
-Should I instead begin to plow as much money as I can into a taxable account with a goal of getting a lot more invested soon? I have a slightly modified three fund portfolio.
-Should I instead focus on paying off the ($300Kish) mortgage on the rental house?
-Is there something else I should be doing with my new earnings?

Thanks for any insight that you can share.
Nick
Trapper
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Re: Post Divorce Next Steps

Post by Trapper »

Be the best Dad possible for your kids.
Topic Author
infromed
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Re: Post Divorce Next Steps

Post by infromed »

Thanks, I am trying. Financial security is part of that, hence the post.
dachshunddad
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Re: Post Divorce Next Steps

Post by dachshunddad »

I personally would lean toward renting a low cost place. Keep your living expenses low and plow into investments and grow your nest egg. I’d put saving for a house in a second place. After I had a nest egg, I would think about a house. Of course, this is a personal decision and owning a house may be more of a desire for you.
New Providence
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Re: Post Divorce Next Steps

Post by New Providence »

A priority would be concentrate that the new family structure is running well before trying to maximize investment opportunities.

There might be expenses you haven't thought about it such as babysitting, activities for the kids, entertainment (post pandemic), 529, etc, that you must accounted for first.

Give it time, keep yourself liquid. Once the new family structure has settled down and it is clear what expenses look like then you can move to other decisions such as large d/p or larger mkt investments.

Good luck.
bampf
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Re: Post Divorce Next Steps

Post by bampf »

Hi Nick,

A couple of quick thoughts:

You are 45 and want to retire in 10 years.
Rental property and about $200K in tax deferred.
~$300K mortgage debt for equity property @ $9600 cash flow

We don't know your expenses.
We don't know the profit on the rental.
We don't know your investments.
We don't know your total debt.
We don't know the interest rate on the mortgage for the rental.

If you want to retire, the idea would be to minimize expenses. You should also have a really rich understanding of your expenses. Track them very carefully.

To your questions:
1. Can't answer unless we know a more complete picture (interest rate, liquid savings, aa and taxable portfolio). There are several schools of thought on never paying off a mortgage, but, that assumes you are putting the money to work elsewhere. I like to be debt free, but, I also found out that I made as much money in the market as I ever did while being a landlord and a LOT less stress.
2. See answer 1.
3. See answer 1.
4. See answer 1.

Hard to offer practical advice without a more rich understanding of your situation.

Best of luck! Post some details and we can try and give some better advice.
Topic Author
infromed
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Re: Post Divorce Next Steps

Post by infromed »

bampf,

Thank you. I am debt free except owe $300K on a rental property (at 3.5%) that is worth $600K or $650K at current values. The property rents for $3k/month and my cumulative expenses (mortgage and property maintenance) are about $2.2K/month. So it cash flows $800/month.

I have $100K in a deferred compensation account in low cost index funds and another $100K tax deferred in vanguard account in index funds. I have a simple portfolio of total market, total bond fund, total international, and some TIPS.

My biggest expense is rent because I am in a high cost of living area and I wanted to keep the kids close to my ex, who got the house in the divorce. I pay $3K/month in rent. Other than some fun money for us to have outdoor adventures together (we are going dog sledding together next month, for example, and I also plan to buy a small tow-behind camping trailer for Spring/Summer fun) we live pretty reasonably and don't have huge expenses. Just groceries, kids sports fees (which add up) and other normal life stuff. But I could stand to improve the tracking of these expenses to get a clearer handle on them.

I have about $100K in cash right now sitting in a bank account. I expect to get about $30K more in January. The amount of money that I will have coming in will fluctuate depending on the success of my new consulting venture. I have one contract that includes a minimum number of hours. So I will not make less than $200K/annually. But it could be more, possibly double that if I am exceptionally lucky/perform extremely well. I am trying to figure out where to direct those new funds.

Thanks for your thoughts.
Nick
Dottie57
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Re: Post Divorce Next Steps

Post by Dottie57 »

It doesn’t look like the rental property is making much for you. I would sell. But then again I would hate to manage a property.
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WarAdmiral
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Re: Post Divorce Next Steps

Post by WarAdmiral »

infromed wrote: Sat Dec 12, 2020 11:44 am -Is there something else I should be doing with my new earnings?
also start thinking about estate planning - Trusts and Wills.
sd323232
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Re: Post Divorce Next Steps

Post by sd323232 »

i would save save save. Do not invest if you plan to buy a house.

Investing is for next 20-30 years.

In the end, you cant go wrong with simply saving money.
Topic Author
infromed
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Re: Post Divorce Next Steps

Post by infromed »

Dottie57 wrote: Sat Dec 12, 2020 1:05 pm It doesn’t look like the rental property is making much for you. I would sell. But then again I would hate to manage a property.
Thanks. It requires very little time and effort on my part. It's in an area that has appreciated rapidly and barring a major sustained depression, all indications are that it will continue to appreciate. So I think I will hold it for now.
Minty
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Re: Post Divorce Next Steps

Post by Minty »

WarAdmiral wrote: Sat Dec 12, 2020 1:24 pm
infromed wrote: Sat Dec 12, 2020 11:44 am -Is there something else I should be doing with my new earnings?
also start thinking about estate planning - Trusts and Wills.
And life insurance, if you don't have it.
Core Four w/ nominal bonds & TIPS. Refi Rampage: Purchase: 3.875% 30 -> R1 3% 20 -> R2 2.375% 15 -> R3 1.99% 15
Topic Author
infromed
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Re: Post Divorce Next Steps

Post by infromed »

sd323232 wrote: Sat Dec 12, 2020 1:32 pm i would save save save. Do not invest if you plan to buy a house.

Investing is for next 20-30 years.

In the end, you cant go wrong with simply saving money.
That makes sense. Though it feels weird to have debt accruing at 3.5% against me while I am saving at .5%.
hi_there
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Re: Post Divorce Next Steps

Post by hi_there »

"If possible, I would like to retire by 55"

How much do you need to save in the next 10 years for this to happen?
egrets
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Re: Post Divorce Next Steps

Post by egrets »

I would have a fat emergency fund with two kids depending on me, and anyone can lose a job at any time. Also, as said above, a will, provisions for a guardian in case both you and your ex-wife pass away.
Topic Author
infromed
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Re: Post Divorce Next Steps

Post by infromed »

hi_there wrote: Sat Dec 12, 2020 2:17 pm "If possible, I would like to retire by 55"

How much do you need to save in the next 10 years for this to happen?
I'm not sure. To some extent it depends how successful I am in my new consulting venture. If it continues to be profitable, I could scale back hours to just working part time at 55. If I can achieve a paid off house and $1.5 million in assets, I would feel pretty comfortable stepping away, particularly if I am still making some money on a part time basis.
vas
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Re: Post Divorce Next Steps

Post by vas »

I'll put in another vote for saving. In part because your consulting income is variable. Just as important, building up cash gives you peace of mind and flexibility. The other options: investing, buying a house, paying off mortgage will still be there for you if you change your mind.

There is no need to make any big decisions at this point. Your plan to live below your means, save, spend time with the kids camping, is spot on. Work hard at the new consulting job, enjoy the kids, and check back in after a year or two.

Earlier comments on wills, estate plans, etc. is a good idea too. Make sure you have a suitable level of life insurance so the kids' are squared away.

Best of luck
There is nothing you can't prove if your outlook is sufficiently limited
dharrythomas
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Re: Post Divorce Next Steps

Post by dharrythomas »

Paid off house and $1.5M is aggressive in 10 years. Projected returns for the next 10 years are expected to be low based on current valuations and interest rates. You’ll still have the kids on the payroll in 10 years. What does the divorce agreement say about the kids college? How long are you required to pay alimony? That may not go away with early retirement. You may need to add that into the equation.

$1.5M doesn’t seem like a lot for early retirement with the kids.

As hard as it has been on you, divorce is very hard on the kids.

Good luck and God bless.
sd323232
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Re: Post Divorce Next Steps

Post by sd323232 »

infromed wrote: Sat Dec 12, 2020 2:12 pm
sd323232 wrote: Sat Dec 12, 2020 1:32 pm i would save save save. Do not invest if you plan to buy a house.

Investing is for next 20-30 years.

In the end, you cant go wrong with simply saving money.
That makes sense. Though it feels weird to have debt accruing at 3.5% against me while I am saving at .5%.
thats the price you pay for security. if you dont want to do that, you can pay off mortgage then.

if you wish to invest, dont think you will get 10% return in one year. it could be 10% or -10%. up to you.
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mrspock
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Re: Post Divorce Next Steps

Post by mrspock »

Trapper wrote: Sat Dec 12, 2020 11:55 am Be the best Dad possible for your kids.
But put on your own oxygen mask first. You can’t be a good dad if you are miserable, stressed or unhealthy.
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rh00p
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Re: Post Divorce Next Steps

Post by rh00p »

Is there something else I should be doing with my new earnings?
If they're higher than what they were, don't let your ex find out.
Preparing for the worst. Hoping for the best.
59Gibson
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Re: Post Divorce Next Steps

Post by 59Gibson »

It's great your comp is going up to 200k, that should give you some firepower to ramp up savings.. but there is no sugar coating it the rental property #s are not good. I'd sell and invest the equity and/or use to purchase a primary to live in.
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dziuniek
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Re: Post Divorce Next Steps

Post by dziuniek »

You mention buying a house. I get it. Stability for the kids especially in this whirlwind of a change.

But I am not sure it makes sense financially.

I think this is very area dependent....

You could sell your rental or move into it if it's cheaper than buying another property.

Say.... the house you wanna buy is 500k but by then you only have 200k on the rental property.... IDK just throwing it out there.
humbledinvestor
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Re: Post Divorce Next Steps

Post by humbledinvestor »

In the same boat as you. While everyone's numbers are different, after also debating as to whether I should buy the marital home or buy a different home I decided to rent. Personally for me it is easier to rent (I am also in a VHCOL) as it is very simple and let's me focus on time with my child and financial recovery. It also allows me to save save save - no landscaping, no house repairs, no need to buy tons of furniture. I have been and am in your shoes so I know what it's like. Have similar salary to yours.
feehater
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Re: Post Divorce Next Steps

Post by feehater »

Nobody's been talking about account types, but if you're new to 1099 consulting after being a w2 employee, make sure you understand all the different tax-advantaged retirement account options, and max those out first before doing any taxable savings or mortgage paydowns.
SouthernFIRE
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Re: Post Divorce Next Steps

Post by SouthernFIRE »

59Gibson wrote: Sat Dec 12, 2020 4:13 pm It's great your comp is going up to 200k, that should give you some firepower to ramp up savings.. but there is no sugar coating it the rental property #s are not good. I'd sell and invest the equity and/or use to purchase a primary to live in.
To be more specific, about 1.5% cash on cash return. About equivalent to some dividend focused funds. Really bad for real estate. Betting on future appreciation in RE is generally regarded as poor strategy. Even if you get a couple percent a year, this property is likely to underperform alternative uses for your money.
deserat
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Re: Post Divorce Next Steps

Post by deserat »

feehater wrote: Sat Dec 12, 2020 5:02 pm Nobody's been talking about account types, but if you're new to 1099 consulting after being a w2 employee, make sure you understand all the different tax-advantaged retirement account options, and max those out first before doing any taxable savings or mortgage paydowns.
+++++ On the above...I was very pleasantly surprised at how lucrative self employment could be for tax deferred sheltering purposes. I was a bit behind the solo 401K boom, but even with an SEP IRA, the top limits are much higher than that of being an employee....so if you are frugal, you can shovel more into tax deferred and then leisurely convert to Roth in your lower taxable income times.
Topic Author
infromed
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Re: Post Divorce Next Steps

Post by infromed »

SouthernFIRE wrote: Sun Dec 13, 2020 7:29 am
59Gibson wrote: Sat Dec 12, 2020 4:13 pm It's great your comp is going up to 200k, that should give you some firepower to ramp up savings.. but there is no sugar coating it the rental property #s are not good. I'd sell and invest the equity and/or use to purchase a primary to live in.
To be more specific, about 1.5% cash on cash return. About equivalent to some dividend focused funds. Really bad for real estate. Betting on future appreciation in RE is generally regarded as poor strategy. Even if you get a couple percent a year, this property is likely to underperform alternative uses for your money.
Good points. I bought the property 9 years ago for $375K and it's now worth $650K. I refinanced once. Selling now would have significant tax consequences, which is one of the reasons why I have avoided it. Also it's doubled in value. And it's an old house that is close to downtown in a very desirable area, so I suspect that it will continue to appreciate. But given the amount of equity in the property, it doesn't cash flow well at all. But all of the equity is appreciation rather than money invested. Does any of that impact the calculus about whether to sell?
Topic Author
infromed
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Re: Post Divorce Next Steps

Post by infromed »

deserat wrote: Sun Dec 13, 2020 9:46 am
feehater wrote: Sat Dec 12, 2020 5:02 pm Nobody's been talking about account types, but if you're new to 1099 consulting after being a w2 employee, make sure you understand all the different tax-advantaged retirement account options, and max those out first before doing any taxable savings or mortgage paydowns.
+++++ On the above...I was very pleasantly surprised at how lucrative self employment could be for tax deferred sheltering purposes. I was a bit behind the solo 401K boom, but even with an SEP IRA, the top limits are much higher than that of being an employee....so if you are frugal, you can shovel more into tax deferred and then leisurely convert to Roth in your lower taxable income times.
Thanks. I am excited about that aspect of a SEP IRA.
Topic Author
infromed
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Re: Post Divorce Next Steps

Post by infromed »

humbledinvestor wrote: Sat Dec 12, 2020 4:50 pm In the same boat as you. While everyone's numbers are different, after also debating as to whether I should buy the marital home or buy a different home I decided to rent. Personally for me it is easier to rent (I am also in a VHCOL) as it is very simple and let's me focus on time with my child and financial recovery. It also allows me to save save save - no landscaping, no house repairs, no need to buy tons of furniture. I have been and am in your shoes so I know what it's like. Have similar salary to yours.
Yeah, renting does present significant advantages. It sounds like things are going pretty well for you. That's great!
Topic Author
infromed
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Re: Post Divorce Next Steps

Post by infromed »

rh00p wrote: Sat Dec 12, 2020 4:03 pm
Is there something else I should be doing with my new earnings?
If they're higher than what they were, don't let your ex find out.
We have non-modifiable maintenance in our divorce decree, so the alimony numbers won't go up. But even though we share custody, I am the higher earner so pay some child support. It's not an overwhelming amount. It probably will increase next year.
Topic Author
infromed
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Re: Post Divorce Next Steps

Post by infromed »

dharrythomas wrote: Sat Dec 12, 2020 3:04 pm Paid off house and $1.5M is aggressive in 10 years. Projected returns for the next 10 years are expected to be low based on current valuations and interest rates. You’ll still have the kids on the payroll in 10 years. What does the divorce agreement say about the kids college? How long are you required to pay alimony? That may not go away with early retirement. You may need to add that into the equation.

$1.5M doesn’t seem like a lot for early retirement with the kids.

As hard as it has been on you, divorce is very hard on the kids.

Good luck and God bless.
Thanks for your thoughts and good wishes. We are to share college costs. Alimony only for four years. My hope for retirement at 55 may be unrealistic. The lesson of 2020 for me is that life is full of unpredictable changes, and flexibility and adaptation are the only way to survive/thrive. So I may have to work longer if I get there and find that my expenses are still too high.
stungerz
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Re: Post Divorce Next Steps

Post by stungerz »

As someone else mentioned, see if you can move into the rental house. If you established residence there, the longer you live there, the less taxes.

Another option, talk to an accountant about this, is to do a 1031 exchange with your rental for a house that you want to live in, rent it out for a year or two and move in. That should allow you to defer and eliminate taxes.
SouthernFIRE
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Re: Post Divorce Next Steps

Post by SouthernFIRE »

infromed wrote: Sun Dec 13, 2020 11:33 am
SouthernFIRE wrote: Sun Dec 13, 2020 7:29 am
59Gibson wrote: Sat Dec 12, 2020 4:13 pm It's great your comp is going up to 200k, that should give you some firepower to ramp up savings.. but there is no sugar coating it the rental property #s are not good. I'd sell and invest the equity and/or use to purchase a primary to live in.
To be more specific, about 1.5% cash on cash return. About equivalent to some dividend focused funds. Really bad for real estate. Betting on future appreciation in RE is generally regarded as poor strategy. Even if you get a couple percent a year, this property is likely to underperform alternative uses for your money.
Good points. I bought the property 9 years ago for $375K and it's now worth $650K. I refinanced once. Selling now would have significant tax consequences, which is one of the reasons why I have avoided it. Also it's doubled in value. And it's an old house that is close to downtown in a very desirable area, so I suspect that it will continue to appreciate. But given the amount of equity in the property, it doesn't cash flow well at all. But all of the equity is appreciation rather than money invested. Does any of that impact the calculus about whether to sell?
In my opinion, it is MORE reason to sell. You have something like 30 years worth of cash flow in equity value that could be redeployed into assets with higher prospective returns. I don't know what market you are in but residential real estate appears to be historically hot basically nationwide (yes, yes, I know real estate is local). If you sell, I would definitely do a 1031 exchange to defer the tax hit.
av111
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Re: Post Divorce Next Steps

Post by av111 »

stungerz wrote: Sun Dec 13, 2020 12:18 pm As someone else mentioned, see if you can move into the rental house. If you established residence there, the longer you live there, the less taxes.
Yes this looks like a good idea if it is within manageable distance from custody point of view. Saves on rent and potentially gets rid of the taxes on sale AND you can lower the mortgage down to sub 3 levels. Maybe gets you going out again

Edited to add I think selling may be a terrible idea in an economy where Fed is trying hard to inject inflation. Unless you expect interest rates to rise, house prices will only go up
AV111
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