When Life Changes - Divorce & Career Downsizing

It happens.
You don’t want it to happen, but relationships change and employees get downsized. Those two events can have a major impact on your finances. There are ways you can navigate both.
Smart, calm, and comprehensive planning is the FIRST step.
Sara works with separating couples and workers who are resetting or even retiring after a layoff.
She offers impactful insight in SARA MAKES SENSE

Got a question for Sara? Send her an email at ask@saramakessense.ca and she might respond to it in an upcoming episode

Sara's website is https://www.wddevelopment.ca/ 

Transcript

Sara McCullough: (00:16)
It's hard to believe that we're over one year in, living with COVID. I clearly remember a phone call with a physician client of mine in March of 2020. At that time, the schools had been closed for two weeks and he said to me, “Sara, this isn't going to be two weeks to flatten the curve, it's going to be at least eight to 12 weeks and you need to be prepared for that”. And here we are, 52 weeks in and counting. Just the number of changes and the level of uncertainty can cause us to rush to make more changes and feel more uncertain. And as all of these pandemic changes are happening, many of us are experiencing other significant life changes. In this episode of Sara Makes Sense we're going to talk about two of them; divorce or the end of a significant relationship and job loss. These are emotional events. They are also financial events. So how do you make decisions when there's so much riding on the outcome and there's still so much uncertainty? Today, we're going to make financial sense of uncertainty, loss, and then talk about how you plan to stabilize moving forward. 

Sara McCullough: (01:26)
There's a couple of similarities between divorce and separation, and a job loss. The biggest one is, you thought you knew; you thought you knew who you were going to be with for the rest of your life. You had a structure; you had a plan. With your job you thought you knew where you'd be working, you thought you knew what your responsibilities were, you knew who your colleagues were and then that gets taken away or that falls apart. But at the same time, you didn't really know; 80% of my clients who come to me, whether they are in either of those situations or not, overall 80% of my clients come to me with cash management questions, right? Income versus expenses. I don't understand Sara, my bank account; I just can't figure it out. So if 80% of my clients are coming to me with that question and part of what's driving your stress in a separation or a job loss is, well I thought I knew the situation. 

Sara McCullough: (02:36)
Remember concurrently with that you also know that you didn't know the situation. So probably in a relationship, you may not have known how your bank account behaved. You may not fully understand what you own and what you owe. So if you didn't know this before, and now you're in this situation and you're going to need to make decisions about how to divide assets, you're going to need to make a decision on support payments. And so how do you do that? So that's one of the biggest stressors for my families when they are separating. The other one when you're separating or in a job loss, is when you were together or when you were working; if you didn't have enough so if you felt like your bank account was, was running either into the negative or kind of running right down at the end of the month, if you didn't have enough when you were together or when you were working at that job, how are you possibly going to have enough now? And so that again, causes uncertainty, causes stress and until you have clarity on where you are, a little bit of where you were, it's almost impossible to make solid decisions going forward. And so that's a little bit of what we're gonna talk about today is so you can help to, to start organizing your thoughts and understand where are your decision points? Because we often miss those too, there's a lot of places that we can make decisions and they're not always immediately obvious when we are the ones in the situation. 

Sara McCullough: (04:30)
All right. So divorce.  You're in a relationship. You thought you would be together forever and now you're not. And you don't really know what that looks like other than you're ripping everything in half. But remember I said 80% of my clients come to me with cash flow, expense and income questions so you didn't probably really know before. So where do you start? Part of my role with my clients who are separating is to help them organize their stuff. So what do you have? Most people are surprised by what they own and what they owe. Um, a lot of my clients in this situation, we spend time working through, um, the idea of if it wasn't for the divorce I would've retired fine. And now there's no way I can do that. And I hear that it doesn't matter how old you are when the separation happens. 

Sara McCullough: (05:38)
I hear that across the board. What I often have to say back to these clients is, if you had come to me and you had been married for 30 years and you had come to me to do your retirement plan together, I would have told you that you, you were either in trouble or that you needed to make some choices. You weren't going to be able to have everything that you wanted. So sometimes the divorce is not compounding the financial problems that were there when the relationship was together. And it's importan. I think for clients to understand that for a couple of reasons, it helps them really understand then what are they dividing? Right? So then we can really get a solid sense of what's there. What does a division look like? What are their options? And it gives them a better frame of mind to move forward because they have the rest of their lives. 

Sara McCullough: (06:44)
Some of that is financial. Obviously, some of it is also emotional. So once you are separated, one of the joys of being separated is you then get to make your own decisions. So if you don't like what was happening previously. So if you didn't understand the ins and outs of your bank account. You didn't really have a good sense of the assets and debts in the relationship. Once you are separated, you can make that choice for yourself. And so understanding that the divorce may not have tanked this beautiful, smooth retirement that you had in your mind gets you set up much better to both make decisions in the division and in the settlement conversation, and also sets you up to move forward better. 

Sara McCullough: (07:36)
A big part of, um, getting things settled in a separation is understanding what you're keeping. So the biggest feeling again, is loss, division ripping things in half; but what are you keeping? And then what decisions can you make on that? One of my separation clients came to me after she and her husband had had several meetings with a mediator and she was about to sign, um, a separation agreement. So they had come to terms and she contacted me because she got cold feet at the last minute. So she was ready to sign. It had not been an easy process and then a few friends weighed in and her banker weighed in and she got cold feet. So the two biggest assets that they had were a house and his pension and in the proposed settlement, she would let go of any claim on his pension. 

Sara McCullough: (08:46)
So he was going to keep his pension. She was going to keep the house. And she said, “Sara, everybody's telling me that that's a bad decision and I don't know what to do but I can't, I'm, I'm so scared of the idea of going back and renegotiating this whole thing. So if I go back and say, you know, I, I want part of his pension, I'm scared. I don't want, we've gotten so far and I can't start over again”. And I said, okay, so in our first meeting we talked a little bit. So I had her numbers by then. And so I showed her, okay, so this is what it looks like. You understand what you're getting out of it; financially you are stable. She was employed. Um, but then about 45 minutes into that conversation, she says to me, I really hate the house. And this was the asset she had agreed to keep. 

Sara McCullough: (09:50)
And I said, all right, so you have options though because she's talking about doing, you know, a six figure renovation to this house that she hates so, so that she could love it. Um, and we talked about a couple of options, and then I said; all right, you could remember go back and ask to divide the pension and divide the house. You could sell the house now. So neither of you gets the house and then you divide that way. And she said, I, I just don't think I can go back and start all over again. And I said, all right, so you can sign this the way it is. You keep the house, he keeps his pension. And then once you've signed and the house title is in your name, only, you could list the house for sale and buy something that you really love. And she said to me, what? I said, well, you can sell the house. You own it. At that point, you own it. You, you can sell it. 

Sara McCullough: (10:51)
And that had never occurred to her and she was a very smart woman; she had a PhD. So this, this wasn't a smarts problem. This was, uh, in her head she agreed to keep the house in the separation. And she hadn't understood what her options were once the house was in her name alone. Of course you can sell an asset that's in your name, if I say it to you, that way, unconnected from all of the emotion of the separation, of the negotiations that had happened, of all of the stress, of course you would say, yes, I can sell the house. But it took for her, somebody else saying, all right, you've told me your priority now is not to go back and renegotiate from the beginning and I'm focused on how do I get her as close as possible to an ideal situation and she had already said this house wasn't ideal. 

Sara McCullough: (11:54)
All right. So let's put the first goal in place of wanting to settle this and needing to settle it and again, financially, the settlement made sense. So then we talk about after, what can you do? And she hadn't thought about that. So for her, it just made the conversation and the decision much easier once I was able to lay out her options. And as it turned out, they did go back and renegotiate the whole thing. They sold the house; they listed it jointly, sold it, split it, and she split his pension and it worked out fine. So again, until sometimes somebody objective, an observer, comes in and says, this is also an option; it's very, very hard to see what's possible. So talking about housing and separating, my goal for all of my clients is that they're financially stable and particularly in a separation situation; when they probably didn't fully understand the finances going in we are dividing. Household expenses will be different. Financially stable adults are just better parents. So my goal for my clients, especially in this situation, is that they are financially stable and there are a number of definitions of that but I think it's important that you work through those, again in the emotion of the situation often, especially when kids are involved, one parent wants to keep the house, often the other parent wants to buy another house.  

Sara McCullough: (13:45)
That's a lot of real estate on the same incomes that were previously supporting one house. So how do you look at what's affordable and what's not? What the banks tell you is affordable is very, very different from what's affordable on a day to day basis; the banks ignore a lot of your expenses. One of my families; he wanted to keep the family home she wanted to buy in the same neighborhood. When I looked at their numbers, both of them would be running a slight deficit every year and that to me was a concern. So I explained here, here's what you told me was important to you, so I prioritized your expenses in this way. My concern is that both of you are going to be slightly underwater every year and eventually that's going to catch up with you. 

Sara McCullough: (14:59)
And she was so upset, she was so angry with me and she finally said, “but the bank will give us the loans. I can get a mortgage and they'll agree to loan him enough money to buy me outta the house”. And I said, “I agree”, based on their incomes the bank will lend to them because the incomes met the ratios that the banks use for mortgage but the bank doesn't care about all of these other expenses that you have, that you've told me are important; particularly in this family the activities for their children. It's important that you understand what's possible because otherwise you're going to get in and in a couple of years you're probably going to have to get yourself back out; which I think can be more stressful than making a different decision at the time. And that was a real difference for me with another family that I was working with, um, close to the same time. They also had children. He also was going to keep the family home and she was going to buy in the neighborhood. 

Sara McCullough: (16:19)
And when we looked at it, they had a similar shortfall situation. The difference was, they did both have some investments that they could have accessed to cover a temporary shortfall. The other difference for this family was both of them had much more upside potential in their income. So one of them worked for a startup company so she had a bigger bonus opportunity and he was looking at changing careers and so he would have potentially earned more money. With my other family they had both worked at the same companies for 18 years, which again, banks love when they're lending; when I'm planning, that gives me no upside, right? You are capped. 

Sara McCullough: (17:16)
So, for my second family, as we talked it through and they did prioritize the housing for their children. And so we worked out their long term plan, and I was clear with both of them. You can do this, but the only way you will have a financially stable retirement is if you both sell your homes and downsize when the boys leave. So, it worked, for a time but they they needed to know how long was this going to work for? And in my opinion, they also needed to know, here's the change that you are also agreeing to today, so you are agreeing today that in approximately eight years for this family, they would sell and downsize because financially stable retirement was also important to them. First it was the boys then it was financial stability. So we worked it out. Again, you're making choices that are focused on what remains, not what you've lost, but what remained and what stayed within their control. I also believe that we are better knowing the situation, even when it's difficult, than not knowing. I think when you stop at the bank approved me for a mortgage in my separation, I think you are losing so much and you are compounding stress down the road at a time when you could have been rebuilding. 

Sara McCullough: (19:10)
So moving on to job loss, I said earlier there are some similarities between the two events. You thought you knew the situation, um, you were working for a company, it seemed stable. I find even my clients who, um, would say; I knew there was a risk, I knew the company, you know, I I've known for a couple of years that the company was a little shaky or there've been layoffs before. Or I have worked with some clients, um, in Calgary, in the energy field, so they know this is cyclical. However, when it happens to you, it's a different feeling than knowing theoretically, right? So when you get the letter and you get the package, again, it, it pulls apart your plans. So, 80% of people aren't comfortable with their cash flow, then this happens, right? The rug gets pulled out from under you or you're temporarily uncertain. 

Sara McCullough: (20:21)
And in a job loss situation, I find clients default to; what assets do I have? How much cash do I have? But they don't always connect it to what they need. And we also, in those conversations, forget about our biggest asset. And let me give you an example of that. So one appointment I did with a client who had recently been laid off, he did still have a mortgage, he was the sole income earner in the house and his children were still all at home. And so he was very concerned about how to maintain the level of financial stability that he had built over the last number of years. And one of his other big questions was about deferring his mortgage. So this was a fairly recent layoff. He was still in the window where banks were allowing a six month, six month mortgage deferral because of COVID. And he said to me, Sara, I everybody's telling me to defer my mortgage. And I don't want to do that. Even my financial advisor who managed his investments, he said, even my financial advisor told me to defer my mortgage. I don't want to, is that a stupid decision? And so we talked through the amount of his severance. He did have some cash savings in the bank. 

Sara McCullough: (21:56)
And so we talked about how long that would carry him with no other income. And for him, it was probably about 18 months; and he hated debt. It was very important to him that he didn't, for him deferring the mortgage felt like sliding backwards and he didn't want that. And that's when we talked about his biggest asset; his biggest asset is his earning potential. For most of us, our biggest asset is our earning potential. And we don't protect that. For him deferring the mortgage would've felt like sliding backwards. If he feels like he's sliding backwards, he is not going to do a good interview. Right? So my goal in a lot of those meetings is trying to figure out how can we preserve the client's ability to interview well? If that's their biggest asset, why are we not protecting it? Why are we talking about houses and mortgage and mortgage rates? We need to protect the biggest thing first. 

Sara McCullough: (23:09)
So as we talked, I said, all right, you can choose to defer the mortgage, go the six months, you have cash in the bank so if your employment situation has changed in the next six months, and you are re-employed, I said, you can go in any day of the week and take the mortgage off deferral. You can make up those payments if you have cash in the bank. So again, it didn't have to be an either or decision. He was still in control of what he did even after the deferral. But again, we forget sometimes what we can control and what we can't once we've made a decision. 

Sara McCullough: (24:03)
Another one of the clients that I did a financial counseling session with after layoff, he was a budgeter. If you've heard my other podcasts, I may have said the traditional idea of budgeting works for so few people that I'm surprised it still survived this long. This was one of those clients. He had a spreadsheet, he had all of his expenses broken out, and he was very, very concerned about cutting costs because he had been laid off. And so again, we looked at, what money did he have from his severance? What did he have in savings? What were his clear financial obligations, so expenses that he could not adjust. 

Sara McCullough: (24:52)
And he was going to be okay for probably 14 months. And so then I moved to talking about his biggest asset, which again, is his earning ability. And I said, how do you feel about your prospects for re-employment? And he said, well, I was offered a contract position yesterday and I have an interview next week. All right. Then I said, so that sounds good. And he said, yes, but I'm thinking I should cut back on, you know, my spending, because I normally, I have a hobby; it costs me about, you know, $130 every quarter. I thought maybe I should cut that. I said, how important is it to you? He said, well that's when I socialize and so it is really important. 

Sara McCullough: (25:47)
Okay. So I went back to, if that hobby helps you interview, well, please spend the $130 to protect your earning potential,l to protect your employability. But again, when you're in the situation, often our first instinct is to cut as much as possible. And so it sometimes takes somebody else to reflect back but here's what you've done already to protect yourself against an unexpected financial shock. And here's where you actually are today. You have cash, you can meet your obligations and we are looking to protect your biggest asset, which is your re-employability. So again, the similarities between divorce and job loss, it's the uncertainty. It's the, I thought I knew the situation and now I don't; coupled with, I didn't really understand my finances before, and I can't possibly begin to put them together now. When you're making decisions in an environment like that, where there's so much uncertainty and so much emotion, I believe it's really important that you have the clarity of, what do you own, what do you owe? So what is the actual situation? What decisions are important to you? What outcome is important to you? So start planning from there, but then have other options. There may be something that you hadn't considered. There may be something that's actually more appealing to you than what you thought you wanted to hang onto. 

Sara McCullough: (27:56)
And that's where having a plan can help you come through those experiences, focused on what you kept, not what you lost, which changes the possibilities going forward. So those were some really heavy issues. I hope we made sense of some of them, particularly as we've gone through the past year, the pandemic has been hard on all of us. And this is where we need to acknowledge the emotion and also acknowledge the actual financial realities. I'm Sara McCullough, I really hope you've been able to, um, grab onto a couple of tangible things today. If you're facing the issues we've talked about, I really hope I've clarified some of them for you, and at least helped you form some questions. Often in these situations, I find it's hard for clients to even ask the question. Most clients, when they finally do contact me, especially when it's related to a separation, most of them say I've had your number for a while. I just didn't want to call. I didn't know. And I say, you didn't even know how to ask a question and they say, yeah, I, I didn't even know what to ask you. So I am thrilled if I have helped you form your questions. My goal for you in both of these situations is to see what's still there, to see what remains to see what you've kept and to see what you want to keep. 

Sara McCullough: (29:55)
If this episode was helpful to you or you think it would be helpful for a friend, please forward it. If you have any ideas for an episode, or if you have questions that you would like to hear me answer, you can reach me by email at sara@WDdevelopment.ca. And remember your plan belongs to you, not to your planner. 

Disclaimer: (30:21)
The information in this podcast is intended for general information and illustrative purposes. For advice relevant to your specific situation, meet with a qualified financial planner, lawyer, or accountant before making any changes to your situation. Sara's designations and licensing include: Certified Financial Planner, Registered Financial Planner, Certified Divorce Financial Analyst, and holding an insurance license.