Divorce, Money And You: Considering Your Settlement Options

Finances Divorce Expert: Jo Ousterhout

Elle’s divorce, now in its second year, was taking much longer than anticipated – dragging on through the summer and into early fall.

When we spoke in late May, she had expected everything to be wrapped up by mid-summer. And Elle was excited about beginning her new, post-divorce life. She was looking forward to working and focusing on her two children during their final years of high school.

However, a divorce settlement was proving difficult to reach. She called me in early September to discuss the latest offer from her husband and his attorneys. One-time payment of $90,000, with no further claim on his assets. (Child support payments had already been agreed. upon and would not change, no matter how the other assets were divided.)

“The divorce was one thing she had some control over. She was ready to settle and be done with it.”

Divorce Proceedings:

Elle was tempted to agree to the $90,000 and thus put a stop to the entire divorce proceedings. At this point it had taken well over a year. Of all the issues she was worrying about – the divorce, a move, COVID, and two teenagers, the divorce was one thing she had some control over. She was ready to settle and be done with it.

Elle’s story is a common one – the grind and confrontation of a divorce can wear anyone down. And, at some point, many women just want the whole proceeding to be over and are ready to settle. My mom, several friends, and clients have all done that. It’s a very emotionally justifiable sentiment. However, it’s often not the smartest move for longer-term financial health.

“Should she accept the $90,000 now, end the divorce proceedings, and relieve her constant stress?”

Relieve Her Constant Stress:

I asked Elle about the totality of her husband’s assets in addition to the $90,000 he was offering. She said the main asset was his pension, which would pay him $52,000 per year starting in five years. However, and not surprisingly, he had told his attorneys he was unwilling to part with any part of it.

So what should Elle do? Should she accept the $90,000 now, end the divorce proceedings, and relieve her constant stress? Or, should she start bargaining for part of the pension? Despite her soon-to-be-ex’s adamant refusal to part with any of it? (There was no legal reason why she wouldn’t be entitled to part of it.)

Women live longer than men, so we need more resources to provide for our longer lives. But, typically, we have lower savings – we generally have lower lifetime earnings than men. And many of us work part-time for at least some of our careers. In addition, because of lower earnings and part-time work, our average Social Security checks are less.¹ 

“It’s a good start, but she will need more than that for retirement.”

Personal Financial Plans:

The combination of lower savings and lower Social Security checks is a problem for women. Add to that, the reality that many women do not participate in the investment/wealth-building aspects of the family finances leaves women in a vulnerable position. Many women do not incorporate investing into their personal financial plans. It means women are often woefully unprepared for divorce and retirement.

Elle is 53, and she expects to work until she’s 65. She has a good job with a solid, fast-growing company, and excellent benefits. She hasn’t saved much during her life, but is now putting money away in her 401(k) every month, and receiving her company’s matching funds. Based on what she’s saving now, she can expect to have about $200,000 in 12 years. It’s a good start, but she will need more than that for retirement. If she retires at 65, she can expect to live 16 more years on average, and quite possibly much longer.

Proposed Payment:

If she takes the proposed $90,000 payment and invests it in the US stock market, she could expect to earn, on average, somewhere around $4500-$5000 (let’s say $5,000 for purposes of this article). So if she took that money today, invested it at an average return of 5.5 per annum, and never touched it, she would have $173,000 at age 65, $226,000 at age 70, and $411,000 at age 81.

However, if she instead is able to negotiate a share of part of her husband’s pension, she will be better off over the long term. Even a quarter (25%) of his pension payment would equal $13,000 per year. The pension plan begins payments in five years, so for each of those five years, she would forgo the $5000 in investment earnings on the $90,000 (a total of approximately $25,000).

But once the pension payments began, assuming she invested them in the same manner as the $90,000 payment, she would start catching up; by her retirement age of 65, Elle would have $112,000, at 70 she would have $222,000 and by 81, she would have $600,000.

“You won’t be able to keep all the money invested as you grow older – you will need some to live.”

Keep All The Money Invested:

The pension payment would continue for Elle’s entire life (and quite possibly be adjusted upwards for future inflation).

Elle could also bargain for more than 25% of the pension (25% was chosen arbitrarily, simply for illustrative purposes; there is no legal reason she cannot ask for more). If she received 30% and invested it as above, she would have $146,000 at age 65, $289,000  at age 70, and $780,000 at age 81.

Another possibility is to have a share of the pension plus a share of the $90,000 – all her husband’s assets are available to be shared.

Of course, you won’t be able to keep all the money invested as you grow older – you will need some to live. So ideally as you negotiate your divorce settlement, you will have a good idea of what your living expenses will be during retirement and can include them in the settlement analysis.

“The long term is what we need to plan for.”

Emotionally Draining:

Elle’s primary long-term goal is to not be a financial burden on her children as she ages. Having a claim to at least part of the pension (and possibly a share of the $90,000 as well), is the smarter and more financially solid choice for Elle, even though the necessary negotiations may well be difficult and emotionally draining in the short term.

The thing to remember is that what looks great today may not be the best choice for the long term, and for women, the long term is what we need to plan for.

An important note: This article was written for illustrative purposes only; it represents, and simplifies, for the sake of brevity, one person’s story. Every divorce is different, in terms of the personalities and relationships of the divorcing couple, the amount and types of assets to be divided, tax implications, if any, and relevant state law, among other factors.

Analyze The Best Options For You:

Consult your divorce attorney and other divorce professionals to help you formulate and analyze the best options for you. If you feel you need help analyzing the financial effects of a divorce settlement, consider hiring a finance professional, such as a Certified Divorce Financial Analyst^®  who can help both you and your soon-to-be-ex partner better understand the long-term ramifications of a proposed settlement.

(1. In 2019, women age 65 and older received an average annual Social Security income of $13,505, compared to $17,374 for men. That’s about $1,125 per month for women and about $1,447 per month for men. https://www.ssa.gov/news/press/factsheets/women-alt.pdf )

Did you enjoy this article? Become a Kuel Life Member today to support our ad-free Community. Sign-up for our Sunday newsletter and get your expert content delivered straight to your inbox.

About the Author: