Divorce Planning

Mar 18

Ways to Divide Parent Loans in Divorce

By Saki Kurose | Divorce Planning , Financial Planning , Student Loan Planning

Table of Contents

Introduction

Divorce is stressful and complicated and hurts on so many emotional and financial levels. It becomes even more complex when you throw in the additional financial stress of student loans. It can be hard to deal with even after you have decided that a student loan is a marital or separate debt.

Student loans are a complex liability because there are so many different and complex methods for repayment. They come with many acronyms such as PAYE, REPAYE, IDR, and PSLF.

The borrower’s circumstances can also play a huge factor in deciding how to deal with student loans properly. For example, you might not have to repay your student loans in total if you get student loan forgiveness for various reasons. The most common are taxable long-term forgiveness or Public Service Loan Forgiveness.

How student loans are handled in a divorce is not altogether easy to understand. Depending on the laws of the State in which the divorce occurs, if one of the parties incurred student debt before the marriage, it could be considered separate property. It is especially common if the borrower’s partner received no economic benefit from the student loans or if the parties come from certain states that have community property laws (1).

But what happens if you have Parent PLUS loans that you took out for your children? Let’s imagine a case in which a couple has been married for years, and one spouse has taken out $250,000 of Parent PLUS loans under her name to pay for their two children’s college education.

Unfortunately, this is a common situation. Arguably, because the Parent PLUS loans were taken out during the marriage for the benefit of their children, they ought to be considered marital debt (1).

$250,000 of Parent PLUS loans

Let’s take a closer look at the case of Jack and Jill. They are both 55. Jack makes $180,000 a year working for an accounting firm, and Jill makes $45,000 working for a 501(c)(3) non-profit organization.

Jill has $250,000 of federal Parent PLUS loans that charge a 6% interest rate. As a result, Jack and Jill expect to pay $2,776 a month or $33,312 a year. Even with a joint income approaching $200,000, it is a significant financial burden that impairs their ability to plan for retirement and other long-term goals.

Refinancing the Parent PLUS loans

If Jack and Jill refinance at 3%, it will reduce the monthly payments to $2,414 a month. Although the $362 monthly savings are welcome, they are not a significant improvement in their situation.

Divorce has a way of making money scarce and future projections challenging. In many divorces, the division of assets and debts approaches 50%, meaning that the burden of paying for her half of the loans would be significantly greater on Jill, who only makes $45,000 a year. Even with an asymmetric division to reduce Jill’s share, it will likely not be easy to sustain (2).

Other Factors to Consider in Divorce

Jack and Jill have agreed to sell the family home as part of the divorce. They expected to net about $250,000 after expenses and mortgage repayment to be divided equally. Jack wants to use the proceeds from the sale to pay off the entire parent loan balance. Jack had heard horror stories about other parents not being able to retire because of parent loan payments, so he wanted to get rid of the balance and not worry about monthly payments that could continue into his retirement.

So, he and Jill decide to split the loans down the middle. It means that Jack will pay Jill $125,000 from the sale of their shared home since the Parent PLUS loans are in Jill’s name. With that, Jack’s share of the parent loan debt is addressed, and he believes that Jill should use her share of the sale to pay her half of the debt.

Summary of Jill’s Parent Loan Repayment Options

Here’s the thing. With the $125,000 that she would receive from Jack and her $125,000 share from the home sale, she could pay off the debt and move on to other issues. Jill was all in on the idea of each side paying half of the loans until she spoke to a Student Loan Strategist and decided to take a different route with the $250,000 of Parent PLUS loans still in her name.

Jill has always been passionate about providing support for vulnerable children worldwide. She works full-time at a local charity, a 501(c)(3) non-profit organization, making $45,000 a year. She loves her work and has no plans to retire for at least ten years. In this case, Jill could qualify for Public Service Loan Forgiveness (PSLF). It means that she could get her loans forgiven tax-free after she makes 120 monthly payments in an Income-Driven Repayment plan (2).

Here is a summary of Jill’s parent loan repayment options:

Make a lump-sum payment of $250,000 from the sale of their marital home ($125,000 from Jack + $125,000 of Jill’s share) to pay off the entire loan balance.
Keep the $250,000 proceeds and pay off the loans with the federal Standard 10-year repayment plan or private refinancing.
Enroll in an Income-Driven Repayment plan and pursue PSLF.

Let’s take a look at each option in detail.

Make a lump-sum payment of $250,000 from the sale of their marital home ($125,000 from Jack + $125,000 of Jill’s share) to pay off the entire loan balance.

In this case, the total cost of the parent loan is $250,000. This way, Jill can get rid of the parent loans in her name. However, Jill still needs to figure out her post-divorce life, including how to pay for her new housing and how to invest the other assets she may receive from Jack from the asset division from their divorce.

Keep the $250,000 proceeds and pay off the loans with the standard federal 10-year repayment plan or private refinancing

The cost of paying off $250,000 of federal loans with 6% under the default 10-year Standard repayment plan is $2,776/mon and $333,061 total over the ten years. However, if Jill could find a private refinancing deal at 3% interest for the same 10-year term, the cost is $2,414/mon and $289,682 total, which is $362/mon and $43,379 savings in total. It may make sense for Jill to do that if she needed to use the $250,000 home sale proceeds to buy a new house to live in, and she could afford the $2,000+ per month of payments for the student loans. However, this is not an attractive option for Jill since her monthly income is $3,750, and the loan payments would absorb so much of it. Even if her divorce agreement provided for alimony, it would still be difficult.

Enroll in an Income-Driven Repayment plan and pursue PSLF

Typically, federal Parent PLUS loans are only eligible for one of the Income-Driven Repayment plans called the Income-Contingent Repayment (ICR) plan even after being consolidated into a Direct Consolidation Loan.

Still, in some cases, they can be “double consolidated” (read more about this loophole strategy here) and qualify for cheaper Income-Driven Repayment plans. For example, let’s say that Jill double consolidated her parent loans, enrolled in Pay As You Earn (PAYE), and pursued Public Service Loan Forgiveness for ten years. Then, filing taxes as Single every one of those years, working for the 501(c)(3) employer and making the same level of annual income ($45,000 adjusted annually for inflation), she pays $205 to $283 monthly and a total of $29,059 over ten years.

The remaining loan balance (which happens to be $430,633 under this scenario) is forgiven tax-free under current tax rules. In this case, assuming that Jill makes the $205~$283 monthly payments out of her cash flow, she gets to keep all $250,000 from the home sale proceeds and pay off the parent loans for just under $30,000. She can use the $250,000 to buy a new home for herself or invest it in retirement, whatever she and her wealth strategist thought would work best (3).

The burden is still on the Borrower spouse

Did we mention that student loan repayment options can be complicated? Jill should ensure that she has her ducks perfectly aligned before engaging in the double consolidation/PSLF strategy. In the worst case, she could have missed something and may remain liable for the entire loan and the full payment or end up with a very large tax bill. Hence Jill should get an experienced student loan strategist to counsel her on her strategy.

If she felt inclined, she could discuss this PSLF option prior to the divorce with Jack and divide the benefit between them. However, Jill should remember that the burden is still on her because under this strategy, she has to stay in the PSLF program for ten years. That obligation is not quantified but should be considered in the asset division.

Summary

Sometimes we can find a silver lining in the worst situations. In their divorce, Jack and Jill could take advantage of a quirk of student loans and could save up to hundreds of thousands of dollars. As a result, Jill could have an additional $220,234 to support her lifestyle.

Student loan repayment strategies can be very different depending on the situation. For example, it would be an entirely different situation if Jill’s income was higher, her employment did not qualify her for PSLF, or she retired earlier than expected. There are still pitfalls ahead for her.

Solutions to student loan problems tend to be very unique and difficult to generalize. If you have federal student loans, the short and long-term costs can significantly differ depending on your income situation and the repayment plan you choose. However, as a federal student loan borrower, remember that you do not always have to pay back the entire loan balance.

Everyone’s situation is different, especially in divorce, especially with student loans. If you are unsure what to do, reach out for help. It might pay off!

Notes:

Consult an attorney to figure out what applies to you
Consult a financial professional with a specialization in student loans
Consult a financial planner
Note: The projection in the PSLF option assumes that, among other factors such as Jill’s PSLF-qualifying employment status and family size staying the same, Jill’s income grows 3% annually, which increases her monthly payment amount each year. Individual circumstances can significantly change results.

Jan 20

What Financial Specialists Do You Need?

By Chris Chen CFP | Divorce Planning , Financial Planning

Should you get a financial specialist to help with your divorce? Most people start their divorces looking for a mediator or a lawyer, not a financial planner so that can be a startling question.

Yet divorce is likely to be the largest financial transaction in a person’s life. Larger than buying a house. Larger than paying for graduate school. Larger than raising a child. While marriage may have been about love, now that the flame has been extinguished, divorce is about securing the future and rebuilding a financially successful life. That is why it is crucial to make sure that the division of assets and income is fair, meets your needs and that of your children, and allows you to thrive after the divorce.

Divorce can be complicated to navigate, and for that, you most likely need a lawyer. They are trained to help you through this complicated legal process. However, divorce contains many intricate details that can have long-term consequences on your finances and are beyond the education and horizon of lawyers.

Table of Contents

Lawyers are important, but…

There is no question that you need a lawyer’s professional experience and skills in navigating the choppy waters of what is essentially a legal process. There are many intricacies in the way that divorce gets handled across issues such as child support, asset division, alimony, inheritances, and trusts that need the steady hand of a skilled lawyer.

Lawyers bring you to the finish line; that’s what you pay them to do. However, people divorcing have other needs to help them move on afterward. They need to make sure that the division of assets and income allows them to pursue their goals and lead fulfilling lives. And because modern life has made professional work so intricate and specialized, you have to ensure that you get the right professional for the right job.

Divorce lawyers do try to protect their client’s interests. Nevertheless, few lawyers are financial experts. It’s not part of the curriculum in law school, and financial planning is not part of the practice of the average divorce lawyer.

Three Questions You Need to Answer

Dealing with the immediate, potential, and future financial consequences of a divorce is where a qualified financial analyst can best help. A financial expert can help your divorce by helping you answer three critical questions:

The first question is, where are you today financially? What are your assets and your liabilities? What is the joint marital income, and what are the ongoing expenses?

Surprisingly, many people can’t answer those questions precisely. As long as the bills are paid, and the checking account balance is over the minimum, many are too busy dealing with the other issues of life to pay attention.

Diane Pappas, a veteran Certified Divorce Financial Analyst in Gloucester, MA, observes: “A lot of times when I’m working with a couple…they won’t know what they have in retirement accounts, what kind of assets they have. Sometimes they don’t even know what kind of money they’re making. So they literally have to go look at their paycheck to know what they’re getting paid.”

It’s difficult enough to go through the planning process that is required in a divorce without knowing that basic information. If you don’t even know where you are today, how will you be able to cope with all the financial changes that will occur during the upcoming split? If you don’t know where you are today, how will you figure out where you are going and how to get there?

The second question is, where will you be the day after the divorce? After answering the first question, it’s essential to navigate your negotiations to a settlement that can help you move forward. A quick example is a decision about the marital home. Should you keep it? Should you sell it? Should you sell it LATER after the children graduate? Can you afford it? Similar questions can be asked about most other financial issues. Of course, that also applies to liabilities or the debt owed on credit cards, student loans, or the remaining mortgage balance. Then there is the potential challenge of making ends meet on less income.

The third question is, where will you be 5, 10, or even 15 years down the road after the divorce? That is the measure of a successful divorce negotiation and successful post-divorce financial planning. Ignoring this question is easy because of the immediacy and stress of more immediate issues. It’s easier just to let the process move forward, however slowly, and hope for the best outcome. But without a solid answer to this question, you will not be able to provide informed consent for this largest transaction in your lifetime.

In fact, the inability to answer this question may prevent you from closing an agreement because you may not have the confidence to move forward.

Deferral or procrastination during emotional stress is human nature, especially when you are unsure what questions to ask and how to analyze the data. That is where borrowing the expertise of a knowledgeable professional can pay off. Getting the best divorce-related financial advice early in the process will pay dividends down that long road beyond the day that the divorce becomes final.

Common Financial Specialists Used In a Divorce

Bringing a financial expert into the divorce process can make the difference between making an informed decision that gives you a path forward or having to pick up the pieces later. Financial experts and advisors can play a useful role in divorce financial planning. However, it can be challenging to determine which financial specialist to pick, as they come with many different stripes and colors. Some of the major categories include:

Certified Public Accountants (CPAs) often focus on taxes. Because one of the significant challenges of a divorce is to figure out the tax consequences, it is essential to have that expertise on board. In addition, CPAs will sometimes also work on forensic accounting to help find hidden assets.

Business valuators get involved when the divorce case includes the ownership of a business. Regardless of the involvement of each spouse, the business is likely to be one of the most valuable assets of the marriage, one that is exceedingly difficult to divide. Using a business valuator will allow the parties to put a number to the business and facilitate the negotiation.

Certified Financial Planners: CFPs focus on bringing the client from the present to the future, beyond the effective date of your divorce. In a divorce situation, they do so by helping to optimize a settlement offer to take care of the now and position for the future. Some of the focus areas can include retirement planning, risk management, and investments. CFPs can bridge the gap between the attorneys’ focus on getting you to the divorce finish line, and your need for solid post-divorce planning that will lead you to financial independence. It is a skill set that is frequently overlooked or missing during divorce negotiations.

Certified Value Builders (CVBs) are a less common specialty. They help business owners increase the value of their business, often a top priority for business owners fresh out of a divorce. When the business owner and the Certified Value Builder are successful, the business owner can shore up the rest of their finances.

Certified Divorce Financial Analysts: CDFAs are financial professionals who help couples, and their lawyers arrive at a fair divorce settlement. CDFAs straddle the expertise of the tax professional with that of the Certified Financial Planner. They use their knowledge of tax law, short- and long-term financial planning, and distribution of assets to help clients reach an optimal settlement.

CDFAs often have other qualifications. Actually, CPAs and lawyers sometimes have the CDFA. But most often, it is paired with the CFP designation. This combination of CFP and CDFA can help clients ensure that their future is well analyzed.

Let’s Recap

You most likely could use a financial specialist for your divorce. The stakes are too high not to. Disentangling and splitting assets requires far more expertise than what a lawyer is trained in. Anyone involved in a divorce really should be able to answer the three basic questions of divorce: where are you financially now? Where will you be the day after the divorce? And where will you be 15 years after the divorce?

Being able to answer these questions, especially the last one, is often beyond the scope of what lawyers do. Yet the answers are critical to making sure that you know what you are getting to and how you will be financially successful after the divorce.

There are many kinds of financial experts running the gamut from tax accountants to business valuators. Many may be needed for some aspects of your divorce. But the most valuable divorce financial professionals may be the CFP/CDFA combination. They have the training and orientation to bring you to the next level: financial success after divorce.

Jan 09

Is a 30% Difference in Retirement Income Fair and Equitable? The Potential Impact of Social Security on Divorced Retirement Income

By Chris Chen CFP | Divorce Planning , Financial Planning , Retirement Planning

Table of Contents

Social Security and Divorce

The complexities of Social Security retirement benefits make it a difficult topic to mediate. It is an exceedingly important source of income for retirees, especially divorced and even affluent retirees. However, Social Security and its place in a person’s retirement income plan are critical items for mediators to understand to achieve the elusive goal of fairness and equity.

The maximum benefit in 2023 is $54,660 a year. Of course, most people don’t get the maximum. Still, as the benefit decreases, I find that it constitutes a greater percentage of income. And, Social Security retirement benefits are challenging to address in divorce settlement negotiations because State courts do not have jurisdiction over its allocation .

For example, if Jack and Jill are retired, are both 66, each have a house of equal value (to simplify), $1.7M in their IRAs, and $300,000 in other liquid assets for a total of $2M, a 50-50 division leaving each party with $1M should be a fair division, right?

Maybe. But let’s first go over some Social Security background.

A Short History

The Social Security Act passed in 1935 included benefits for workers but not their spouses. At the time, women who did not work outside of the home could not qualify for Social Security retirement benefits. A sweeping series of amendments enacted in 1939 extended Social Security to spouses and minor children. Wives who had not earned a social security retirement benefit or whose retirement benefit was less than 50% of their husbands qualified for the first time.

Catching up with a changing society, another reform extended Social Security retirement benefits to divorced wives in cases when the divorce happened after a marriage longer than 20 years. Social Security replaced the word “wife” with the “word” in the 1970s, allowing husbands to collect retirement benefits on their ex-wives’ records .

Later, the length of marriage required to qualify for benefits after a divorce was reduced to 10 years. When SCOTUS legalized same-sex marriage in 2015, survivor and divorce benefits extended to same-sex couples .

This short history of Social Security shows how it has evolved. Ex-wives and ex-husbands can now all receive retirement benefits based on an ex’s work record.

However, qualifying conditions must be met. The rules can be confusing and challenging to keep track of, especially for those who have had more than one marriage and divorce or those whose ex-spouse has died.

Benefits for Divorced People

When a divorced spouse claims their benefit at full retirement age or later, they will qualify to receive 50% of their ex-spouse’s Primary Insurance Amount (PIA), so long as they have not remarried before 60 years of age and their own benefit is less than 50% of their ex-spouse’s.

In Jack’s and Jill’s case, Jack’s PIA is $3,000 per month, and Jill does not qualify for a retirement benefit on her own record. She can file for her divorced-spouse benefit at her full retirement age of 66. She will qualify for 50% of Jack’s Primary Insurance Amount, $1,500, as her divorced-spouse benefit.

The earlier Jill claims her benefits, the less she will get, consistent with other Social Security retirement benefits. Conversely, Jill will receive more if she waits to claim. To maximize Social Security retirement benefits, you will typically need to delay them until 70 .

However, divorced people who claim on their ex-spouse’s record will not get more if they delay their benefits past full retirement age, 66 to 67 depending on the birth year.

Note that should Jill’s own benefit be more than 50% of Jack’s, she will receive her own Social Security retirement benefit. She will not also receive her divorced benefit!

Sometimes people wonder how the age difference with their ex-spouse can affect their benefits. The good news is that the ex-spouse’s age when they claim it is irrelevant. As long as Jill claims at Full Retirement Age, she will receive her maximum divorce benefit independently of the timing of Jack’s claim.

Who Qualifies?

A person who claims benefits based on a former spouse’s record must be single at the time . So unfair, you say? If Jill has remarried, generally, she could get 50% of her new husband’s benefits, or her own, if her own is greater than 50% of her new husband’s. So let’s continue with a single Jill.

Jack may be married or unmarried. It makes no difference. If Jack is (re)married, Jill and the current wife could both qualify for the 50% benefit from Jack’s record.

Suppose Jill, who receives the 50% benefit, remarries. In that case, her 50% benefit from Jack’s record stops unless Jill’s new spouse also gets a divorced spouse benefit. That’s except if the remarriage occurs after age 60.

Jill’s marriage must have lasted ten years or longer to claim Social Security retirement benefits on Jack’s record. Because of that requirement, sometimes people who think of divorce will delay until ten years of marriage are achieved. For example, if you’ve been married for 9.5 years, it may be worth waiting another six months. And with the slow speed of divorce proceedings, that is entirely possible without trying too hard!

Sometimes people are not sure when they got divorced. People often mark their court appearance date as the divorce date. In most states, however, the actual divorce date is later than the court appearance . For example, in Massachusetts it is 90 or 120 days after the court appearance depending on the filing type.

More Marriages and Divorces

People sometimes ask: what if you had two or more ten-year marriages?

Then, it can become complicated. Those who have divorced more than once from marriages of ten years or longer get the higher of the two divorced-spouse benefits, so long as they are currently unmarried.

For example, suppose that Sheryl was married to Patrick for 20 years and to John for 12 years. Sheryl has now divorced for the second time and has remained single for more than two years since her last divorce from John.

Patrick’s PIA is $3,200, and John’s PIA is $2,800. So let’s suppose that Sheryl’s retirement benefit, based on her own record, is $1,200. However, she is at Full Retirement Age (66 or 67, depending on the birth year).

When Sheryl files, she can receive $1,600, half of Patrick’s PIA, because it is higher than John’s $1,400. And, no, she cannot get both Patrick’s and John’s retirement benefits!

If Sheryl divorced less than two years before, she must wait until her last ex, Patrick, in this case, has filed for his benefit. In addition, the worker on whose record the retirement benefit is claimed, Patrick, must have reached 62 years of age.

Patrick’s filing status is irrelevant to Sheryl’s claim if they divorced more than two years before. So unless Sheryl tells him, Patrick will never know if his ex-spouse has claimed.

When Your Ex dies

Mike and Marie are 66 and have been married for more than ten years and divorced for more than two. Because Marie is single and not remarried, she qualifies for a divorced-spouse retirement benefit based on Mike’s record, whether or not Mike has filed.

If Mike has passed away, Marie receives a divorced-spouse survivor benefit based on Mike’s record if she is currently unmarried or if she remarried after age 60. In addition, Marie’s benefit will be 100% of Mike’s Primary Insurance Amount (PIA), the amount that Mike would have received at Full Retirement Age. In the case of Mike dying, Marie’s retirement benefits are capped to full retirement age.

What if the same two people have married, divorced, remarried with each other, and divorced again? In that case, the length of the two marriages can be added together (including the time in between) to reach the ten years qualifying minimum. That is, if the remarriage happens before the end of the calendar year following the divorce!!

Say Mike and Marie were married for seven years, from May 2002 to August 2009. They remarried in December 2010 and re-divorced in November 2013 for three years. The total for the two marriages is ten years. Mike and Marie meet the 10-year requirement because their second marriage happened before the end of the calendar year after the first divorce.

If, instead, Mike and Marie had remarried in January 2011, the ten-year clock would have been reset to zero.

Pension Repercussions

When Jill applies for her divorced spouse’s retirement benefit, what if she also worked for an employer not participating in the Social Security system? For example, many state and municipal government employees are exempt from paying into the Social Security system . For instance, if Jill was a teacher for her town’s school system, she could qualify for a State pension. But, then, her divorced spouse’s Social Security benefit would be reduced by 2/3 of the amount of her pension because of the Government Pension Offset rule. As a result, Jill’s Social Security benefit may be zero, depending on the size of her pension.

How would that work? Jill currently receives a $3,000 monthly pension from a police department in Texas. She has divorced Jack after more than ten years of marriage. Jack’s PIA is $3,200. Jill’s divorced-spouse benefit of $1,600 would be reduced by $2,000 (2/3 of $3,000), which reduces the benefit amount to zero. She doesn’t get any Social Security.

If Jack dies, Jill becomes eligible for a divorced-spouse survivor benefit. After the GPO reduction she will receive $800 ($3,200 – $2,000 equals $1,200).

Suppose the spouse with the benefit also qualifies for a pension from an entity that doesn’t pay into social security. In that case, the Windfall Elimination Program kicks in. That reduces the spouse’s benefit payments, and the ex-spouse’s benefit adjusts downward as well.

What Does It All Mean?

As a reminder, Jack and Jill are retired and decided to divide their assets 50-50. Jack also benefits from a $3,000 Social Security PIA retirement benefit, and Jill has a divorced spouse benefit of $1,500. Jack opts to delay his Social Security until 70 when his benefit would increase to $4,081. Jill has no such option.

A common (but potentially dangerous) rule of thumb in retirement planning is that if a retiree begins retirement by taking a 4% distribution from assets and increases it annually with inflation, the retiree will not run out of assets in their lifetime (1).

As detailed in the table below, Jack and Jill may have divided their assets 50-50, which may look fair. However, Jill’s income will be 35% less than Jack’s.

	Jack	Jill	Difference
Assets	$1,000,000	$1,000,000	0%

4% Income	$40,000	$40,000	0%
Social Security	$48,972	$18,000	-63%

Total Income	$88,972	$58,000	-35%

Last Words

In the example, the difference between Jill’s and Jack’s total incomes comes to slightly more than $2,500 a month. Over a 20-year lifetime, it can easily add to more than $600,000. When you add COLA increases, the difference will be more than $875,000.

This is not a challenge that can be dealt with directly in litigation because the courts have no jurisdiction over Social Security. However, a couple mediating could potentially address the issue to achieve a more balanced retirement income for both and a more equitable settlement.

The example of Jack and Jill is simplified from cases we might run across. There may be other assets, such as a pension, a vacation home, and rental real estate. There may be child support and alimony. Maybe Jill qualifies for her own benefit. There may be an inheritance looming. Jack and Jill may be further away from retirement. Their investment style may differ.

Diverse circumstances will complicate the analysis. However, it is crucial for a couple and their mediator to understand the consequences of their decisions. That is so especially for women because they will need to stretch their assets to meet their longer statistical life expectancy .

Note:

The 4% rule is widely used as a rule of thumb to estimate retirement income from assets. It was initiated in a 1996 study by Bill Bengen published in the Journal of Financial Planning. More recent revisions of the study imply that the safe withdrawal rule could be less than 4%. Other methods to plan retirement income may be more appropriate depending on the case.
I have a series of handy flowcharts that can help guide mediators and clients through the decision complexities. Please ask for it at info@insightfinancialstrategists.com

May 14

Should Your Spouse Join You in a Divorce Workshop?

By Chris Chen CFP | Divorce Planning , Financial Planning , Retirement Planning

Should Your Spouse Join You in a Divorce Workshop?

As a Financial Planner, I participate in many different types of workshops, including divorce. Pandemic obliging, these days they are usually webinars. Divorce is no exception. Should you suggest to your spouse that they should join you in a divorce workshop? Or do you want to keep the information that you got in a divorce workshop to yourself?

As a Certified Financial Planner, I often answer complicated questions with “it depends.” However, for this question, I will just say, “Heck, yes, bring him or her along”! I recently recommended to a divorce workshop attendee that she come back to other workshops and bring her husband along. As it happens, they are still talking, and my workshops are still Zooming. So, she might be able to get him there. The primary benefit of bringing your spouse to a divorce workshop is that you will start to get him on the same level of understanding about divorce issues.

The first step is understanding that divorce is emotionally difficult to negotiate for both sides. It is even more challenging if the two sides start from different vantage points. Just remember how you felt the last time you dealt with someone with a completely different perspective. For example, think of the last time you tried to persuade your toddler to eat his or her vegetables. You and your spouse cannot have all your questions answered in one workshop or a dozen. Divorce is way too complex for that. But you will both learn something. And most importantly, you will both hear the same information and may learn the same thing. And that can form the basis for a productive negotiation and path forward.

If you and your spouse do go to the same divorce workshop, take it a step further and ask the questions on the points you disagree about. At the workshop, you will get a neutral expert opinion that may be helpful. Is it about planning for retirement with a lot fewer assets? Or whether you should keep your inheritance as separate property? The challenge of introducing the “D” word to the kids? The difficulties of comparing pensions to other assets? The potential for a creative solution? It doesn’t matter what the areas of disagreement are. You will both hear the same answer and have a starting point to move forward.

In war, you want to keep to yourself all the advantages that you can. Divorce may be war, but it is different in at least one respect: it pays to make sure that your spouse is as informed as you are because that reduces your legal bills and gets you closer to the finish line. Heck, it is also worth it to find out that your position might be wrong. That too can form the basis for moving on. You should note that what you hear in a divorce workshop can be great information, but it is not “advice.” Because every situation is unique, you will have to go back to a professional for objective advice. However, all journeys start with one step forward. Getting on the same page can be that important first step.

Mar 23

Should you value your pension?

By Chris Chen CFP | Divorce Planning , Financial Planning , Retirement Planning , Tax Planning

Should You Value Your Pension?

Jill came to our office for post-divorce financial planning. At 60 years young with two grown children, she wanted to know whether she would make it through retirement without running out of assets. A former stay-at-home Mom and current yoga instructor, Jill did not have a professional career. Her work-life consisted of a series of part-time jobs scheduled around her children’s.

Jill traded her interest in her ex-husband Jack’s 401(k) for half of a brokerage account, her IRA, and the marital home. Their lawyers decided that Jack’s 401(k) should be discounted by 25%. That would account for the fact that the 401(k)’s pretax assets would be taxed by Uncle Sam and her State tax authority upon distribution.

Adjustments to the Value of a 401k

That sounds reasonable on the surface. But was a 25% discount appropriate for Jill? After making some retirement income projections, it became clear that Jill would likely always be in a lower federal tax bracket than 25%. Had Jill consulted a Divorce Financial Planner at the time of her divorce, he or she would probably have advised against agreeing to a 25% discount to the value of the 401(k).

Jill and Jack also agreed that she would keep half of her interest in Jack’s defined-benefit pension that he earned as a pediatrician with a large hospital. When they agreed to divide the pension, Jack was unclear about the value of the pension. He thought that it was probably “not worth much anyway.” Neither lawyer disagreed.

This highlights how vital it is to seek advice from the right divorce professional for the right issues: lawyers for legal matters and Divorce Financial Planners for financial questions. When mediators and divorce lawyers team up with divorce financial planners, the additional expense often pays for itself.

What About the Pension?

After some research, I found that Jill would end up receiving a little over $33,000 a year from the QDRO of Jack’s pension. This is significant for a retiree with a projected spending requirement of less than $5,000 a month!

Since Jack and Jill planned to retire in the same year, she would be able to start receiving her payments at the same time as Jack. Also, Jack had agreed to select a distribution option with a survivor’s benefit for Jill.

That would allow her to continue receiving payments when Jack passed away. Jill was aware that women tend to outlive men. So, she was relieved that the survivor benefit was there.

Each defined-benefit pension has its own rules. Each pension division should be evaluated individually.

The Value of Pension Division Analysis

A defined-benefit pension such as Jack’s does not have an easily assessable value in the same way as an IRA or a 401(k). Pension statements don’t come with a dollar value. A pension promises to pay the employee a certain amount of money in retirement based on a specific formula. For the pension to be fairly considered in the overall asset division, a professional must value it.

In her case, Jill’s share of the pension was 50% of the marital portion. Was it the best outcome for Jill? It is hard to re-assess a case after the fact. However, had she and Jack known the value of the pension, they might have decided for a different division that may have better served their respective interests. Jill may have decided that she wanted more of the 401(k), and Jack could have decided that he wanted to keep more of the pension. Or possibly Jill may have considered taking a lump-sum buyout of her claim to Jack’s pension. Whatever the case, Jill and Jack would have had the explicit information to decide consciously rather than taking the default path.

The news that Jack’s QDRO’d defined benefit pension had value was serendipity for Jill. Increasing her projected retirement income with the pension payments meaningfully increased her chances to live through retirement without running out of assets. But it is possible that a better understanding of the pension division and other financial issues at the time of divorce could have resulted in an even more favorable outcome for Jill.

Oct 22

How Can Divorced Women Claim Social Security?

By Chris Chen CFP | Divorce Planning , Retirement Planning

How Can Divorced Women Claim Social Security?

When the Social Security Act passed in 1935, it included benefits for workers, but not for their spouses. At the time, women who did not work outside of the home could not qualify for Social Security retirement benefits. A sweeping series of amendments enacted in 1939 extended Social Security to spouses and minor children. Wives who had not earned a social security retirement benefit or whose retirement benefit was less than 50% of their husbands qualified for the first time.

Catching up with a changing society, another reform extended Social Security retirement benefits to divorced wives in the cases when the divorce happened after a marriage longer than 20 years. The word “spouse” replaced the word “wife” in the 1970s, allowing husbands to collect retirement benefits on their ex-wives record.

This short history of Social Security shows how it has evolved over time. Ex-wives and ex-husbands can now all receive retirement benefits based on an ex’s work record. However, qualifying conditions must be met.

The rules can be confusing and difficult to keep track of, especially for those who have had more than one marriage and divorce or those whose ex-spouse has died.