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Separating finances without conducting a thorough analysis of the assets and liabilities involved can have serious financial repercussions.

Divorce is a difficult process, especially for couples with complex finances. In addition to the emotional challenges of separation, divorcing couples must grapple with the stresses of disentangling their financial lives as well. Wealthy couples over 50, in particular, must deal with a number of complicated issues not typically faced by younger couples, such as the division of large retirement plans, private equity investments, hedge funds, real estate holdings or business interests.


In the face of such challenges, it's easy to understand why a divorcing couple might want to simply divvy things up and move on with their lives. But doing so without conducting a thorough analysis of the assets and liabilities involved can have serious financial repercussions.


Here are five mistakes divorcing couples often make and how to avoid them:


Mistake #1: Not Enough Liquidity


A portfolio that is weighted too heavily toward illiquid investments (such as private equity or concentrated stock positions) exposes an investor to risk. A diversified portfolio that contains a reasonable allocation to liquid assets can help limit potential losses, and provides an advantage in volatile markets. In contrast, it may be difficult to sell illiquid investments in a down market, tying up assets when they may be most needed.

Illustration 1: Not enough liquidity

Mistake #2: Too Focused On Generating Income


A narrow focus on generating income in a portfolio can be a drag on performance, especially in a low interest rate environment. Investors should consider whether their need for income in the present outweighs the potential for long-term growth that could provide income in the future.

Illustration 2: Too focused on generating income

Mistake #3: Not Positioned For Growth


Rising inflation and increases in living expenses over time can significantly reduce the value of a conservatively invested portfolio. For clients with a long-term investment time horizon (say, 10 to 20 years), investment portfolios should be positioned for growth — not exclusively for income. It's also important to consider how rates for key expenses are changing such as medical or education.

Illustration 3: Not positioned for growth

Mistake #4: No Plan For State Taxes


Where an investor lives can affect the after-tax returns of his or her portfolio.


Investors should be mindful of the impact of state taxes when selling their assets. Timing can be critical, especially if the investor has plans to move from a high-tax state to a state with low or no income taxes. The investor may be better off waiting to sell assets until the change in residency is complete.

Illustration 4: No plan for state taxes

Mistake #5: No Spending Plan


Large purchases and significant spending early in the life of a portfolio can have a big impact. For example, a $5 million purchase made in the first year of a portfolio's life can reduce the future value of that portfolio by nearly $12 million, assuming a 5.5% annual return over 30 years. A thoughtful plan can help weigh the advantages and disadvantages of certain spending decisions and illustrate the impact on future wealth.

Illustration 5: No spending plan

Three Steps To Understanding Your Cash Flow In Divorce


At BNY Mellon Wealth Management, we regularly work with family law attorneys and their clients to address these important concerns.


First, we review the key components of the investor's portfolio, analyzing important factors such as the concentration and weighting of assets, how well the investments have performed against benchmark indexes, and the overall construction of the portfolio. Next, we determine what the investor needs in order to maintain their lifestyle and address any wealth-transfer needs. Finally, we work with the attorney and their client to identify what's important to the investor — whether financial independence, leaving a legacy for the next generation or fulfilling philanthropic desires — so future investment decisions can be guided by an appropriate set of goals and objectives.


Working with clients is more than simply the implementation of a process—it’s an ongoing conversation, one that helps us deliver thorough, well-crafted strategies that help assure family law attorneys and their clients that their assets are positioned to fulfill their expectations.


Strategic Solutions For Your Wealth


Beyond cash flow analysis, BNY Mellon Wealth Management offers a variety of strategic solutions that can help investors address their complex financial needs when going through a divorce. We’re here to make sure that investors’ overall wealth and estate plans are ready to handle what’s to come in the next chapter of their lives.

This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation. ©2019 The Bank of New York Mellon Corporation. All rights reserved.