Jinny, age 50, and Jeff, age 70, are getting divorced after 20 years of marriage.
Married couple: Jinny’s age: 50, Jeff’s age: 70
Jeff's earnings: Retired
Jinny's earnings: $30K
Combined savings: $10 million
The Base Plan
Jinny, age 50, and Jeff, age 70, are getting divorced after 20 years of marriage. The couple lives in Tennessee. They have no children. Jeff is retired. Jinny earns $30,000 per year working as a part-time interior designer. Jinny’s job doesn’t offer a 401(k), although it does provide health insurance. Jeff does – a $5 million 401(k). They have $10 million in joint savings (regular assets). Jinny intends to retire when she turns 62 and take social security benefits then. Jeff’s monthly Social Security benefit is $2500. Jeff proposes splitting their regular assets and his 401(k) 50-50. He feels this is more than fair and that there is no reason to pay alimony.
Jinny runs Analyze My Divorce Settlement (AMDS) to see how Jeff’s sustainable living standard will compare with hers under his proposal. She runs the program based on Jeff’s offer, including his assumption that her earnings will stay even with inflation through retirement. The tool calculates how much each spouse can sustainably spend, on a discretionary basis, through their respective maximum ages of life. (The program uses 100 as the default ages.) Discretionary spending references all outlays apart from fixed expenses, which in this case encompasses federal and state taxes and Medicare Part B premiums.
Based on Jeff’s proposed settlement, he can spend $262,014 on a discretionary basis through age 100. Jinny, however, can spend $178,516 per year through her age 100. Hence, Jeff is proposing that he enjoy, on an ongoing basis, a 46.8 percent higher living standard than Jinny. What explains the difference? It’s not the division of assets, which is equal. It’s not differences in labor earnings since Jinny, not Jeff is still working. And their Social Security benefits don’t differ that much -- $2,500 per month for Jeff versus $1515 per month for Jinny once she stops working. The main factor is age. Jeff has 30 years left to go, assuming his lifespan maxes out. Jinny has 50 years left under the same assumption. Sustaining one’s living standard for an extra 20 years is no minor matter as AMDS recognizes.
After examining AMDS, Jinny decides she’s not being treated fairly and that she deserves to enjoy the same living standard annually that Jeff will enjoy. The State of Tennessee’s view on this matter is unclear. The state requires that Jeff pay alimony to Jinny if two conditions are met: Jeff has the “ability to pay” and Jinny has the “need for support.” Jeff certainly has the ability to pay alimony. What’s not clear is the “need for support.” If “support” means being able to survive, Jinny has no case for requesting alimony. If, in contrast, it references having a living standard that is as close as possible to what each spouse enjoyed during their marriage, then she needs the alimony.
Fortunately, Jeff sees things like Jinny. The two can’t stand each other on a daily basis, but they deeply care for one another. The two decide to use the program to determine the amount of alimony needed to equalize their living standards. They figure, correctly, that Jeff will be in a higher tax bracket than Jinny and since they are getting divorced prior to January 1, 2019, they specify in AMDS that alimony is deductible.
What Alimony Will Equalize Jeff and Jinny’s Living Standards?
After trying different values for alimony in AMDS, Jeff and Jinny find the annual amount (valued in today’s dollars) needed for each to afford the same annual discretionary spending. Yearly alimony of $42,150 does the trick, permitting them both to spend $220,325 apart from their fixed costs on an ongoing bias.
Jinny and Jeff are pleased with their agreement and are grateful to have reached an amicable agreement without having spent thousands of dollars in legal fees.