Calculating Alimony Fairly

James and Sandy are both reasonable people, but reasonable people can differ especially when each thinks he/she’s right about the numbers.

The Facts

Married couple: James’s age: 52
Sandy’s age: 45
James’s 401(k) savings: $1.5 million
James’s earnings: $750K

Sandy’s earnings: $25K
Sandy’s retirement accounts: $0
Joint savings: $500K

The Base Plan

Sandy, age 45, and James, age 52, are getting divorced after 20 years of marriage. The couple lives in Massachusetts. James is a well-paid neurosurgeon who earns $750,000 per year. He has a $1.5 million 401(k). Sandy just started a job that pays $25,000 annually. Both Sandy and James will contribute 3 percent to their retirement accounts going forward. Their employers will make equal sized contributions.

The couple has a $500,000 savings account and owns a $2 million home with a $1 million mortgage. Sandy proposes splitting their regular and his 401(k) 50-50, sell their house immediately, and split the proceeds of the sale. James agrees. They also decide to buy $500,000 condos for $500K with the same 50 percent down payment.

According to this Massachusetts alimony calculator, which is based on the state’s alimony guidelines, James owes Sandy annual alimony ranging from $217,500 to $253,708 for a maximum of 16 years. James proposes paying Sandy the lower of these amounts -- $217,500 -- for 13 years until he retires at 65. But he also proposes to adjust this payment annually to keep it even with inflation.

Sandy’s runs Analyze My Divorce Settlement (AMDS) to see whether James’ offer is fair. Specifically, she wants to understand how James’s sustainable living standard will compare with hers under his proposal. She runs AMDS based on James’s offer, including his assumption that her earnings will stay even with inflation through retirement. Since they are getting divorced prior to January 1, 2019, Sandy specifies that alimony will be deductible.

The tool calculates how much each spouse can sustainably spend, on a discretionary basis, through their respective maximum ages of life, in this case 100. Discretionary spending references all outlays apart from fixed/required expenses, which in this case encompass federal and state taxes, housing costs and Medicare Part B premiums.

Based on James’s proposed settlement, James can spend $94,338 on a discretionary basis through age 100. Sandy can spend $78,757 per year through her age 100. Hence, James is proposing that he enjoy, on an ongoing basis, an 19.8 percent higher living standard than Sandy.

After examining AMDS, Sandy decides she’s not being treated fairly and that she deserves to enjoy the same living standard annually as James. Sandy runs AMDS repeatedly with different levels of alimony until she finds the level that produces equal spending going forward. Yearly alimony of $251,375 (on an inflation-adjusted basis) does the trick, permitting them both to spend $85,886, apart from their fixed costs (e.g., taxes), on an ongoing bias. This alimony amount, which is 15.6 percent higher than James proposed is within the range suggested by Massachusetts’ guidelines.

Compensating James for Working Harder

Sandy sends James a PDF with the equalized spending calculation. James considers her request, but point out that his job is far more stressful than hers and that in committing to paying alimony, he’s taking on the risk of losing his job. Sandy counters that they can make the alimony modifiable if his earnings drop materially. After some back and forth, James suggests splitting the difference and Sandy agrees.

Bottom Line

James and Sandy are both reasonable people, but reasonable people can differ especially when each thinks he/she’s right about the numbers. AMDS can resolve disputes about the numbers. It can also focus divorcing couples’ attention on the key question—what is a fair settlement as measured by each party’s projected future living standard. In so doing, it can keep couples from spending tens of thousands of dollars in legal disputes asking lawyers to resolve complex computational questions that no mathematician on the planet, let alone a lawyer can possibly get straight—questions that the software can resolve in seconds.