Ken & Mary’s Challenges:
Throughout their marriage, Ken had excelled in his engineering career. Full-time work, combined with two pensions and lifetime health benefits, had provided him with significant stability in retirement.
Mary, in contrast, had earned considerably less working as a part-time bookkeeper. Her retirement savings consisted of a small 401(k), and what she anticipated would be modest Social Security benefits. She had planned to live off her and Ken’s combined retirement savings and Social Security benefits.
She worried that her decision to seek a divorce later in life would completely upend her plans for her golden years. Forcing her to leave the community she was so emmeshed in, and possibly even the need to return to work.
Ken worried due to their vastly different spending styles and retirement expectations, that reaching a mutually satisfactory divorce agreement would not be possible.
Step One: Identify the shared interest
Ken and Mary had vastly different ideas of what retirement would look like. Which caused an enormous amount of friction, and ultimately led to their divorce.
Given the chasm between them, neither party could see that in reality, they both wanted the same thing: a lifestyle that met their definition of retirement.
So before we could even begin to guide them to agreement, we needed them to first understand they could each get what they wanted, without it being at the expense of the other.
Step Two: Establish a solid foundation from which to negotiate
To ensure their negotiations stayed focused and productive, and to improve the chances of both their needs being met, we guided Ken and Mary through a comprehensive budgeting exercise to assess their financial situation.
We analyzed nearly 100 distinct aspects of their shared expenses, creating a detailed financial portrait that revealed their spending patterns and priorities within their economic partnership.
Our analysis showed their spending was well within their means, and that their substantial retirement assets, combined with years of frugality, had positioned them well for the future.
However, two issues remained: addressing the imbalance in their savings and ensuring each could maintain their desired lifestyle.
Step Three: Negotiate a mutually beneficial agreement
With clear post-divorce living costs established, we focused on dividing their income streams and community property in a fair and equitable way.
Using a customized model, we projected their annual post-marital spending with inflation adjustments. During our negotiations, several income disparities emerged.
Ken's projected Social Security at age 67 would be nearly $2,000 higher than Mary’s. And he had two pensions providing him with an additional $1,730 in monthly benefits.
To address these gaps, we first negotiated a spousal maintenance agreement where Ken and Mary would share equally in their combined Social Security payments and Ken's monthly pension benefits. This arrangement would continue until either Ken's passing or Mary's remarriage.
Despite a lifetime of savings, Mary’s 401(k) balance was still 25% lower than that of Ken’s.
With this in mind, we then shifted our attention to community property division. We developed three property division scenarios, analyzing:
- Monthly free cash flow
- Anticipated lifespans
- Projected investment returns
- Annual drawdown needs
- Cost of living increases
This analysis helped Ken and Mary visualize their potential annual spending and income requirements under each scenario. Combining these analyses with their previously reached spousal maintenance agreement, we negotiated agreement on a 55/45 split of the 401(k)s – in Mary’s favor.
Doing so would accommodate Mary’s desire to travel while still allowing Ken to maintain his optimal retirement lifestyle.
At the time of their divorce, mortgage interest rates were not favorable, which suppressed home prices in the Kirkland market.
To prevent them from having to sell in a trough, we helped Ken and Mary negotiate a co-habitation arrangement which allowed them to continue living in the home.
Included was a framework for a semi-annual “keep/sell” review, and agreements on care and upkeep, as well as operational and capital costs.
As Mary anticipated traveling frequently, she would be away from home often, leaving Ken with primary use of the residence. This arrangement made a cohabitation agreement practical.
