Equitable Alimony

Economics can’t say what’s fair, but it can help with divorce settlements by showing who’s really getting what and how to make the best out of a bad situation. Take Frank and Stacy Loveless. Frank’s 45, Stacy’s 38. He’s a dentist, she’s a dietician. They live in Saint Louis with their two kids, ages 7 and 3. The couple met in Frank’s dentist chair a decade ago. Stacy asked him out and, boy, what a wedding and what a great marriage until, well, things changed. Their main goal now is settling their affairs without declaring war.

Not easy. Stacy’s never been great with numbers. But she’s nobody’s lunchmeat and isn’t sure Frank’s offer is all that generous. Frank’s the big earner, netting $150K a year. Stacy earns $30K. The practice, were Frank to sell, is worth $300K. The couple has $500K in regular assets and a $500K house with a $200K mortgage. Frank has $200K in his 401(k).

Frank’s is offering Stacy the house and all their regular assets. He’d keep his practice and 401(k). He’d also pay $15K per year per child in child support, but nothing in alimony. Frank claims this is more than fair.

Let’s listen to their exchange.

“Look Stacy. I’m giving you assets worth $1 million and retaining only $500.”
“Whoa fella. Aren’t you forgetting the mortgage?”
“Well, ok, but there’s only 15 years left, and the interest is deductible.”
“I may not have enough deductions to itemize.”
“Well, all the money in my 401(k) is taxable on withdraw.”
“Yes, Frank, but you’re making five times my salary.”
“Right, and paying ten times your taxes.”
“I’m a lot younger. My money has to last longer.”
“You have more years to earn.”
“You’re paying $1,250 a month to rent an identical house, while I have all the housing expenses.”
“You can sell the house when the kids leave and rent the same type place.”
“Your Social Security is going to be much higher than mine.”
“Well, dear, let’s not forget Social Security divorcee benefits.”
“Don’t patronize me.”
“Stop calling me cheap.”

Is Frank being generous? Or is Frank setting himself up to have a much higher living standard than Stacy?

ESPlanner can readily calculate each party’s living standard based on the proposed deal taking all the demographic, child support, earnings, asset, alimony, housing, tax, and Social Security benefit factors into account.

Turns out that Stacy’s right. Frank’s living standard is $45,075 a year. He can spend this amount annually and still cover his taxes, child support, and rent. Stacy’s living standard is only $23,659. Of course a lot depends on Frank’s being able to work until 65. If his aching back ends his career at 60, his sustainable living standard falls to $35,214. But this is still almost 50 percent higher than Stacy’s.

Once Stacy runs these figures, she starts lobbying for $10,000 per year in alimony through Frank’s age 60—the retirement age assumption Stacy reluctantly accepts. This lowers Frank’s living standard to only $32,689 thanks, in part, to Frank’s ability to write off the payments. But the alimony is taxable, so it raises Stacy’s living standard to only $25,553.

Stacy’s still 28 percent behind the eight ball, but this is the most she can get from Frank without going to court and facing a judge who may split the assets 50-50 and award zero alimony.

After reaching this agreement, Frank and Stacy start helping each other tweak their plans. They find they can each do better by contributing to retirement accounts, having Frank buy a condo and having Stacy keep the house into retirement.