Divorce and accounting: a word problem

Factual Questions
1

How would you answer this (probably very simple) number-crunching question?

John and Susan are getting divorced after 10 years of marriage. It’s amicable and not very complicated – they don’t own real estate, they don’t have children.

The only complication is their retirement accounts. John, who is 45, has $150,000 socked away. Susan, who is 35, has $50,000 saved. All of it is money earned during their marriage. They live in a “community property” state, so a court would tell them to split evenly and each walk away with $100,000. But a court would also accept an agreement they make on their own.

So, John wants to explore another scenario. As he sees it, he is 10 years closer to retirement than Susan, so if they split 50/50, his savings won’t have as much time to grow as hers will. So he wants to propose some division where he takes a bit more than 50% and she takes a bit less, so that as each of them reaches retirement age (say, 65), they’d each have about the same amount to draw from.

How can John calculate a “fair” (as he sees it) division of the assets to propose? Clearly there will have to be some assumptions made (interest rates, inflation), but how can he figure out which slightly-unequal division today may lead to equal outcomes in the future?

Not asking whether John’s idea is stupid or unfair. Just wondering how to crunch the numbers. Never did understand accounting.

Explanations desired. Thanks in advance,
E.

Yes, it’s my divorce. Yes, we really are amicable and she knows I’m asking a bunch of internet strangers for money advice. Names, ages, and dollar amounts have been altered, not that it matters much.

2

I’m not sure I agree with your reasoning. After all it seems that since it’s community property, it should be treated as equal contributions so you should take equal out, but I’ll answer your question.

Assuming you mean that you want the current $200K to give you equal value at the time you each retire, then what you want is your share in 20 years to have the same value as her share in 30 years

X*(1+r)[sup]20[/sup] = (200,000-X)*(1+r)[sup]30[/sup]

or

X = (200,000-X)*(1+r)[sup]10[/sup]

Pick an r and solve for X. If you want them to be the same in “real” terms then r should be a real interest rate. (A nominal rate less the rate of inflation). If you want the payments to be equal in nominal terms, you want a nominal interest rate.

If you want your total retirement payoffs to be equal including that based on future contributions, then it is much harder even if you assume you’re going to contribute equal amounts each year in the future. But under that scenario you’d need an even bigger share of the current amount since you have fewer years of contributing. But that then introduces the question of why your account is smaller now – possibly because during those extra ten working years you had, you weren’t putting money away, and it’s not clear why your wife should compensate you for that. In any case this division makes little sense to my mind for even more reasons.

I’d stick with the simple calculation – actually I’d stick with a simple 50-50 split, but you asked a specific question.

3

For the case of r = 10%, X is $144,347.71; if r = 5%, X = $123,922.40. Depending on your investment mix, your real-life rate of return will probably be somewhere in there. I’m not going to get into inflation – that’s just depressing.

4

Thanks to both of you (and any other opinions/approaches are still welcome!). And thanks, OldGuy, for playing along even if you don’t agree in principle. I’m not sure I do either…but this is a way for me to think it through.

5

This is a Time Value of Money question.

6

This also assumes that neither party is earning more money to be socked away in the retirement accounts. How much is each making? And are you assuming that they’re putting the same amount in their retirement accounts each month, or the same percentage? And of course, if they’re making different amounts, then they probably expect different standards of living in their retirements, too.

As for fairness, if all of the money has been saved since they got married, but he’s ten years older than her, that would seem to suggest that she started saving earlier in life than he did. In which case it’s a simple natural consequence that he’ll have less time in which to save up than she does.

7

I’m wondering one thing. If the retirement accounts are tax-deferred (an IRA for instance), can you move money between the spouses without some sort of tax penalty?

8

According to my lawyer, you can.

Not sure if I understand you correctly. The scenario described here deals only with the money acquired during the marriage, not money to be acquired in the future. The question is how to make the during-marriage money come out “even” after unequal passages of time. Any future savings toward retirement wouldn’t be something for an ex-spouse to worry about.

Thanks for giving me this context. Interesting reading.