Photo: Robert Trachtenberg
At 52, Diana Thomas* finds herself at a major crossroads. As she and her husband work out the final details of their divorce after 23 years of marriage, Diana must now become the chief financial officer of her new life, and that of her 11-year-old daughter, Mary, for whom she'll assume a greater share of living expenses. That's a big step, and Diana has been anxious. In fact, she e-mailed O at 3 in the morning recently, asking me to help her sort through it all. She told me she sensed things weren't going to add up financially, but that she was ready to take on whatever changes were necessary. "I want to know the truth," Diana told me. "I need a reality check."
Right then I knew she was ready to make the transition to her new life. When you have the strength and determination to face the facts, you can achieve anything. It's when we run and hide that we dig ourselves holes that can be excruciating to climb out of. Embrace the truth, and you'll have what it takes to move forward into a better life. Diana didn't realize it just yet, but she was already well on her way.
An information analyst for a city in Southern California, Diana has a natural talent for sizing up situations and developing game plans. But for anyone facing a major change, one of the hardest steps is recognizing that what worked in the past may not be feasible today.
As part of her pending divorce agreement, Diana will assume full ownership of her three-bedroom, two-and-a-half-bath home, seven blocks from the beach. She and her husband bought the property in 1996 for $355,000, and similar homes in the neighborhood have recently sold for about $950,000. Diana decided she would rather receive the home and its equity in the divorce settlement than 11 years of spousal support. Keeping the home would lessen the impact on her daughter, Diana felt, and would allow her to tap some of the equity to get ahead of a few financial challenges. For starters, she has $7,000 in high-interest credit card debt, and a leak from her deck that will cost $25,000 to repair—neither of which she can comfortably cover with the $11,000 in her savings account. Diana was also planning to use some equity to pay for Mary's college, as well as to supplement her own retirement savings.
I understood her desire to stay put after the emotional upheaval of the separation. But I told Diana that using her home as a savings account would lead to trouble; she would just keep tapping and tapping until she was tapped out. After I pored over the financial information Diana sent me, it was clear that she simply can't afford to keep the house. Diana's gross monthly salary is $6,667. After she pays taxes and sets aside 10 percent for retirement, her take-home pay is about $4,000. She will also receive $1,400 a month in child support for the next seven years. That combined $5,400 a month still leaves her $3,000 short of the amount she needs to cover expenses, the largest of which are her mortgage, property tax, insurance, and utilities (totaling about $3,000), and $1,800 for Mary's private school tuition. The life that was affordable when Diana also had her husband's $150,000 income isn't any longer.
Diana took this information in stride, and right away we discussed what relocation might look like. Diana told me she could rent a two-bedroom apartment nearby for $2,000 or so; that would be at least $1,000 less than her current total monthly housing costs. Then we considered what she might net if she were to sell the home. Because of the sizable capital gain, she will owe some tax if she sells as a single homeowner. (For married couples, the first $500,000 in capital gains is exempt from federal taxation; however, the exemption is only $250,000 for singles.) After paying the agent and eliminating the $7,000 credit card debt, Diana could have as much as $600,000. If she invests that in solid municipal bonds, she could earn 4 percent in tax-free income; that $24,000 a year would cover her $2,000 monthly rent, leaving her entire $4,000 in take-home pay and $1,400 in child support for expenses.
I was glad Diana was open to selling the home, but when I asked her how Mary might feel about the move, there was a long pause. I suggested that Diana present Mary with two options: Downsize to a smaller place and stay in private school, or keep the house and transfer to public school. Diana is the ultimate decision maker here, but acknowledging Mary's wishes is an act of love and respect in this difficult time.
The third option to consider is the most difficult one: Sell the home and have Mary transfer to public school. That would allow Diana to aggressively save for retirement, and for when she no longer receives child support. Many divorcees neglect to plan for the day the spousal or child support will end. When it does, they're often in big trouble.
*All names have been changed.