how our CDFA™'s helped one couple
John and Jane are
40 years old and have two children. They own a home
worth $165,000 with net equity of $77,500. Their IRAs
and 401(k) retirement plan total $165,500 in value.
John earns $90,000 a year and has take-home pay of $68,760
a year. Jane has never worked outside the home and has
no job skills, but she hopes to get a job for $5 an
hour with take-home pay of $8,900 a year.
The following settlement
has been suggested. After the divorce, Jane and the
children will live in the house, which will be deeded
to her. She will also receive $44,000 of the retirement
moneys and John $121,500, thus dividing the assets equally.
John will pay Jane alimony of $600 per month for 5 years
and child support of $225 per month per child. He will
also pay college costs which start in 4 years.
include his normal living expenses, child support, alimony
and college costs. Jane's expenses include support of
the children and are reduced when each child leaves
This appears to
be a reasonably fair settlement. However, an analysis
creates the financial future illustrated in the following
graph. Jane's assets will be completely depleted within
seven years while John's investments will grow dramatically.
improve Jane's financial future, the settlement could
provide her with increased spousal maintenance of $1,500
per month for 10 years. This would actually cost John
$1,005 per month in after-tax dollars. The correct child
support according to the Child Support Guidelines is
$1,125 per month for two children for a couple with
their income. Jane also could be awarded an additional
$24,300 from the retirement plans. She also may need
to cut her expenses by 10%. These changes in the original
settlement will produce the results illustrated in graph
#2. John will still have a surplus which he can add
to his investments. If John stays within his budget
and invests all of his extra income, his investments
have the capacity to grow to $2.5 million by the time
he is age 60.
This sample case
illustrates the value of financial planning as a means
of reaching more equitable divorce settlements. If the
court's intent is to treat both parties in a divorce
as equitably as possible, it is essential to analyze
the marriage as if it were a financial contract, with
tangible investment into it by both parties.