Couples that go through a divorce only start to recover financially after five years and even then a significant gap between the financial footing of a divorced couple and a married couple still remains.
The break-up of a relationship can have a formidable emotional impact on the lives of all people involved but few Australians have considered the complete financial impact of divorce, which can leave both partners financially disadvantaged for over eight years, according to joint research by NATSEM and AMP.
The report revealed sobering financial statistics involving home ownership, employment, income and superannuation, as well as the resulting impact on the children and their education.
Speaking to the report at a session during the Association of Financial Advisers’ 2017 National Adviser Conference, Dianne Charman, director of Jade Financial, recounted a coffee with personal finance specialist Noel Whittaker who said: “Dianne, forget about share market crashes, the most expensive thing you’ll ever do is get divorced, so look after your relationship!”
Charman says: “We tracked the path of recovery in the report. It takes about five years to recover from the financial hit of divorce, but I stress that it does not mean that you have accomplished the same financial health that you would have been at if you were still in the relationship.
“That five-year period is just to get the recovery happening, and if you keep in mind the 3.5 years that it takes just to get from separation to divorce, then it isn’t looking good.”
Although there are no ‘winners’ in a divorce, there are methods of easing the financial pressure of separation. Charman works with collaborative adviser practice, Peters McKeown, which is an association of planners, psychologists and family lawyers who collaborate to deliver an administration service to people experiencing divorce.
The model exists to keep divorce out of the courts as much as possible by working from a mutual position. Both parties in the divorce are consulted and the professionals work in collaboration to find the most cost-effective solution while reducing the stress and tension of the separation.
Access to a qualified group of relevant professionals who are acting in the interests of both parties helps put the reality of divorce into perspective. The ‘no winners’ approach often results in a more rewarding process for the professionals and a smoother and more cost-effective settlement for all parties involved.
Charman says superannuation account balances for divorced women are on average 75 per cent lower than those for married women, and 28 per cent less for divorced men compared with married men.
The cost of separation is felt across most areas of a person’s finances, and the financial burden can be realised early in the divorce process. Although the legal costs involved are a short-term financial impact and generally don’t have a long-term effect after the divorce is finalised, the total household income impacted over the short-term period doesn’t recover until years later, particularly for women.
“If we look at household income one year before the divorce is granted, the parents earn only 86 per cent of the income they were in the previous 4 years. What that tells us is that the process of divorce is an expensive one and those involved must allocate significant amounts of money to it,” Charman says.
“For mothers that have been divorced, in the first five years 66 per cent of their income is spent on living costs, such as paying for groceries or buying clothing. A large portion of their income is spent on just getting by.
“Sixty-eight per cent of childcare costs are worn by the men who are going through the divorce. There are no winners in any of this, but acutely effected are the women.”
Home loan repayments are also a challenge for couples who have undergone divorce. Many couples choose to sell the family home during the settlement as the cost of repayments is hard to bear for a single income, with home ownership rates for divorcees with no dependent children dropping by 16 per cent for women and nine per cent for men.
“The drop in home ownership is mainly because the property is sold for the purposes of property resettlement,” Charman says.
“People do reinvest in housing, but at a lower rate than married couples at 59 per cent as opposed to 89 per cent.
“The rental occupation figures by either the divorced mother or father don’t improve until five years, that’s how long it takes to get back into home ownership. That is a lot of time to go without re-establishing yourself in a new home.”