Married couple: Kyle’s age: 40, Kate’s age: 40
Combined 401(k): $600K
Regular Assets: $700K
The Base Plan
Kyle and Kate, age 40, are getting divorced after 15 years of marriage. The couple earn $100,000 each per year. They each have $300,000 in a 401(k) to which they and their employers contribute 3 percent of pay. Kyle and Kate also have $25,000 each in separate savings accounts, i.e., in regular (non-retirement account) assets. They both intend to retire when they turn 65 and take Social Security benefits at age 66. They’ve already separated and both own condos worth $250,000 with 30-year, $200,000 mortgages. Their monthly mortgage payment is $955. The condo’s other costs, per year, are $3,000 in property taxes, $1,500 in insurance, and $3,000 in condo fees. The couple has no children.
Since they have identical resources, each spouse after divorce will have the same real (inflation-adjusted) sustainable discretionary spending on an ongoing basis. Analyze My Divorce Settlement calculates this amount at $47,842 per year. Discretionary spending references all outlays apart from fixed expenses, which in this case consists of federal and state taxes, retirement account contributions, and Medicare Part B premiums.
Kyle and Kate Have 3 Children
Now assume that Kyle and Kate have three children ages 5, 10 and 15 and that Kate will have full custody of the three. In running this case, we told Analyze My Divorce Settlement that each child would leave home at 19. What happens to Kyle and Kate’s sustainable discretionary spending assuming Kyle pays no child support? It drops immediately from $47,842 to $31,462. It remains at this level until the oldest child leaves home. Then it rises to $34,113 until the second oldest child leaves home. At this point it rises to $41,399 and gradually rises until the youngest child leaves home. When that happens, Kate’s discretionary spending jumps from $42,293 to a permanent value of $45,376.
The reason Kate’s living standard falls is straightforward. She needs to make outlays on the children to provide them with the same living standard as she’s enjoying while they are at home. The tool determines what child outlays are needed each year to give all co-resident family members the same living standard. These child outlays start at $36,296. They remain fixed at this level until the oldest child leaves home. Then they fall to $27,650 and remain at this level until the second oldest child leaves home. When the second oldest child leaves, child outlays fall to $17,927 and then gradually rise $18,316.
Why does Kate’s discretionary spending increase over time? The answer is cash constraints. Until the kids are out of the house, Kate has additional mouths to feed. But she can’t borrow against her future income. Hence, she needs to cut her spending. This means a lower living standard, which rises each time there is one fewer mouth to feed. There is also a gradual rise in her living standard when she only has the youngest at home. This reflects the decline in the real value of her mortgage payments due to inflation. This effect occurs every year she has a mortgage, but it’s not big enough to impact the cash-flow problem in the early years. Note also that child outlays move, as expected, in synch with Kate’s discretionary spending.
Kyle Pays Child Support to Kate
When Kyle compares his living standard to Kate’s, he offers to pay child support. According to Connecticut’s child support guidelines, Kyle owes Kate $20,878 annually when all three kids are at home, $17,888 when the youngest two are at home, and $12,142 when only the youngest is at home. The result? Neither is borrowing constrained, and their consumption is smoothed. Kyle and Kate’s annual discretionary spending values are $45,123 and $46,336, respectively for the rest of their lives. Based on AMDS, Kate and Kyle decide Connecticut’s guideline for child support is somewhat too high. They decide to use AMDS to find values of child support, through time, that equal precisely half of Kate’s child outlays. This puts both spouses in exactly the same position through time.
Child outlays are required to sustain children’s living standards independent of whether the non-custodial parent pays child support. AMDS calculates child outlays that ensure children have the same living standard as their co-resident parent before they leave home. AMDS can also calculate the amount of child support needed to ensure fairness with respect to the living standards of both parents.