Specific Challenges:
The McMillens faced several challenges in their divorce. Ken's earnings had consistently outpaced Mary's, resulting in higher anticipated Social Security benefits for him.
He also had two pensions and a 401(k), while Mary only had a small 401(k).
Additionally, Ken's last employer had provided lifetime health care benefits at a reasonable cost, which they both had enjoyed during their marriage.
Their original retirement plan involved living primarily off Ken's retirement savings and their collective Social Security. The divorce meant they would each have to manage with less, raising concerns about whether they could afford to stay in the area where their lives and friends were centered.
Setting Financial Baselines
In order to begin to address these concerns, I engaged Ken and Mary in a comprehensive budgeting exercise.
I led the couple through an intensive analysis of their shared expenses, encompassing nearly 100 distinct aspects of their life together. This thorough process yielded a comprehensive financial portrait, revealing their spending patterns and the intricacies of their economic partnership.
The baseline helped to determine if their spending was above, at, or below their means, and provided insights into their values and priorities.
The exercise revealed that Ken and Mary had been living well below their means, which gave them some relief. Years of frugality and saving had positioned them well financially, even in the face of divorce.
However, the imbalance in their savings still needed to be addressed, as well as ensuring each spouse could maintain their desired lifestyle.
To see if this was possible, I then had them project out their individual post-divorce spending. This revealed that their combined post-marital budgets would be 25% greater than their marital budget – primarily fueled by Mary’s desire to travel.
This information formed the foundation for the negotiations moving forward.
Negotiating a Fair Income Split
With a clear understanding of their post-divorce living costs, attention was turned to dividing their significant retirement assets.
I developed a customized model projecting their annual post-marital spending, factoring in agreed-upon inflationary increases.
Ken's projected monthly Social Security check at age 67 was estimated to be nearly $2,000 higher than Mary's, even after accounting for her increased benefits as an eligible divorcee.
Adding to the income disparity were Ken’s two pensions totaling $1,730 monthly. To address this gap, a spousal maintenance agreement was negotiated where Ken and Mary would share equally in their combined Social Security payments as well as Ken's monthly pension checks.
This arrangement was designed to last until Ken's passing or Mary's remarriage, whichever came first.
The agreement was structured as a percentage rather than a fixed amount to account for cost-of-living increases each would receive from the government, or Ken’s previous employers. And also to account for the unknown impact to Mary's Social Security benefits due to additional health care costs being deducted from her check.
Addressing the 401(k) plans was the next step. Employing my financial expertise, I created three property division scenarios, estimating each party's monthly free cash flow based on the division of their 401(k) savings, anticipated lifespan, projected investment returns and annual drawdown, and cost-of-living increases.
This approach allowed Ken and Mary to see clearly what they would be able to spend on an annual basis, as well as which of the property division scenario(s) would cover their projected needs.
With this knowledge I was able to guide Ken and Mary to a mutually agreeable solution with Mary receiving a 55% share of the couple’s retirement savings to account for her desire to travel. While still allowing Ken to enjoy the retirement lifestyle he desired.
The House Dilemma
With support and retirement savings settled, it was time to focus on their shared home. Given high interest rates and suppressed home prices at the time of their divorce, a co-ownership arrangement was devised.
This allowed them to continue residing in the home with a clause for review every six months to reassess selling. Their joint responsibilities were outlined for care, upkeep, and shared expenses, including both regular costs and capital expenditures.
