If a spouse put their career on hold or left the career world to care for children, a 50/50 split may not be fair. Typically, once children are born, a couple will decide that the lower income earner should be the one to stay home with the children. This is usually the woman. This makes economic sense because the couple is investing in the career of the higher income earner assuming that this investment will pay off in the future.
After a divorce, the spouse who put their career on hold no longer benefits from the investment. The other spouse continues to receive this benefit. Career benefits include:
- higher earning potential,
- health/dental/life insurance,
- vacation/sick pay,
- pension plans,
- stock options,
- continuing education and
- social security/unemployment benefits.
The non-employed spouse should receive compensation for the career assets that their ex-spouse will continue to receive.
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“Divorced women
who are also single
parents comprise
the group most likely
to file for bankruptcy.”
Price Waterhouse Cooper
Roll the dice in Vegas, NOT with
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expert. Hire Arons & Associates
Divorce Planning.
Recommended Reading
Difficult Questions Kids Ask
[And Are Afraid to Ask]
About Divorce
Meg F. Schneider and
Joan Zuckerberg
more...
Click to see additional
recommended reading
suggestions from
Arons & Associates.
Counseling Resources
DivorceCare groups are designed so you can begin attending on any week. The classes are free and offered by a number of local churches. They provide very useful information.
Click here to find your nearest DivorceCare group. Public and private schools also offer free counseling for your children.
Do you have SUFFICIENT funds in your retirement accounts? Do you KNOW how much you will need in the future?
We can run scenarios to answer your questions.
45-years-old
45-years-old
Two kids
David and Susan are 45 years old and have two children. They own a Nashville home worth $360,000 with $180,000 of equity. David earns $90,000-per-year and Susan has a part-time job where she earns $20,000-per-year. Their retirement plans have a total of $250,000 in value. In addition, the have cash and investments (stocks) worth $130,000.
Assets
Proposed Divorce Settlement — 50/50 Split
| Assets |
Susan |
David |
TOTAL |
| House Equity |
$180,000 |
$ 0 |
$180,000 |
| Cash/Investments |
$ 50,000 |
$ 80,000 |
$130,000 |
| Retirement Accts |
$ 50,000 |
$200,000 |
$250,000 |
| TOTAL |
$280,000 |
$280,000 |
$560,000 |
David proposes that Susan gets the house worth $360,000 ($180,000 equity), $50,000 of David’s retirement account, and $50,000 of their cash/investments (giving Susan total equity of $280,000). David will get the remainder of his retirement account ($200,000) and cash/investments of $80,000 thus dividing the assets equally. David will pay $1,600-a-month alimony for 3 years and $500-a-month in child support. All assets are equally divided and this appears to be a fair TN settlement. However, a financial analysis clearly demonstrates the future (as shown in Chart 1) is anything but fair.
Effect Of Initial Offer On The Net Worth Of Each Spouse
Keeping the house is financially disasterous for Susan. The large mortgage payment, utilities, and maintenance costs keep her monthly living expenses so high that even with alimony and child support Susan is still spending more than she makes every month. More than half of Susan's assets are tied-up in the house which means they do not generate interest income to help offset her expenses. Susan will have to sell her investments, use her retirement funds and borrow money to make ends meet. Ten years after her divorce she will have spent all her retirement funds AND borrowed money equaling the total equity in her house. In this divorce settlement scenario, Susan's net worth will be zero in about 10 years. By age 55 she will have nothing for retirement and she'll be facing foreclosure on her home.
After viewing this computer simulation, Susan and David understood the long-term financial impact of the proposed divorce settlement. Arons & Associates helped them realize Susan could not afford to stay in the marital home. Susan realized that she needed to have a plan to increase her income long-term. She needed a career, not just a job, if she was to become financially independent post-divorce. After some soul searching, Susan realized she would need two years of training if she was to enter the job market with essential skills.
By selling the marital home and splitting the equity in the house with David, Susan was able to put more cash into her own retirement funds. Women tend to live longer than men and earn less during their lifetime. Women need to secure retirement funds during the divorce because their ability to save for retirement after the divorce is frequently limited.
Final Offer — A Financially Smart TN Divorce
| Assets |
Susan |
David |
TOTAL |
| House Equity |
$ 90,000 |
$ 90,000 |
$180,000 |
| Cash/Investments |
$ 78,000 |
$ 52,000 |
$130,000 |
| Retirement Accts |
$150,000 |
$100,000 |
$250,000 |
| TOTAL |
$318,000 |
$242,000 |
$560,000 |
The marital home is sold and the spouses divide $180,000 of equity equally ($90,000 each). Susan takes 60% ($78,000) of their cash/investments and David keeps 40% ($52,000). Susan takes 60% ($150,000) of their retirement accounts and David keeps 40% ($100,000). This division of assets gives Susan a total of $318,000 (57%) and David gets $242,000 (43%). David agrees to pay $1,600-a-month alimony for an additional 2 years which will allow Susan time to get the job training and skills she is going to need. As in the initial offer, David agrees to pay $500-a-month in child support.
Effect Of Final Offer On The Net Worth Of Each Spouse
Chart-2 shows how the final offer is a fairer division of assets and provides a win-win solution for Susan, David and their children. These divorce financial simulations help David understand why he needs to extend his alimony payments for two years. By selling the marital home and purchasing a place she can afford, lowering her monthly expenses, and beginning a career with higher income earning potential, Susan's financial future will be much more secure. It also helps David realize that his net worth will not be drastically decreased by extending the alimony. There are two reasons for this:
- David’s alimony payments will be tax deductible, so the true cost per month was less than the $1,600-a-month. Understanding this fact makes the payments feel more acceptable to David.
- During the marriage, David was able to focus on his career while Susan took care of the children. This increased David’s earning potential which will allow him to recoup his alimony payments over time.
After viewing this computer simulation, Susan and David understood the long-term financial impact of the proposed divorce settlement. Arons & Associates helped them realize Susan could not afford to stay in the marital home. Susan realized that she needed to have a plan to increase her income long-term. She needed a career, not just a job, if she was to become financially independent post-divorce. After some soul searching, Susan realized she would need two years of training if she was to enter the job market with essential skills.
Because David and Susan understand the financial impact of the proposed settlements, they each understand why compromise from the initial settlement is in their best interests. Their understanding reduced arguing. Less arguing resulted in minimal divorce attorneys' / lawyers' fees.
Arons & Associates Divorce Planning would like to show you the potential short- and long-term impacts of proposed division of marital assets you may be considering (including the effect of alimony/child support payments). Contact us if you'd like more information on how we can help you get a financially smart TN divorce.
Arons & Associates Divorce Financial Planning - Offices: Brentwood, Belle Meade/Nashville, TN
Phone: (615) 376-8204
