Shifting financial incentives for divorce as couples approach retirement.

I should start with the disclaimer that I have a very limited understanding of divorce law in the US, but I do have some direct experience in the area of retirement planning.

A simplified primer on retirement planning.

When planning for retirement, the fundamental question is how much can I spend each month/year without running out of money? Knowing the actual answer to this question would require knowing 1)  How long you will live.  and 2)  What the stock and bond markets will do over the period you are alive.  Obviously neither is possible to know when entering retirement, but there are rules of thumb which have been created taking into account experiences from the past.

There is a great deal of literature on Safe Withdrawal Rates (SWR), which attempts to determine the optimal asset allocation and SWR based on past market performance and estimates on how long someone will live.  To keep the analysis simple and to maximize the funds available to our hypothetical retirees we will instead have them use a product called a Single Premium Immediate Annuity (SPIA).  With an SPIA, the insurance company calculates your life expectancy and agrees to pay you regular payments for the rest of your life in exchange for your lump sum of funds.   If you die early, you still were able to enjoy a better quality of life than if you had stuck with the standard SWR.  If you live longer than expected, well you hit the jackpot more than once.

Hypothetical example.

We’ll start with a hypothetical married couple, Ed age 65 and Edna age 60.  They have net assets of $1 million to retire on (including proceeds from the recent sale of their home), but no pensions, social security, etc (lets keep this simple).  Ed has done his research and decides to purchase a $1 million SPIA covering both of them jointly.  The policy will make regular payments so long as at least one of them is alive.  He goes to Berkshire Hathaway and uses their EZ Quote Tool and learns that their $1 million would buy them $4,825 a month.  This is a non reversable decision, so he and Edna need to consider this carefully.

Meanwhile, Edna has been feeling neglected while her husband has been busy researching boring things like stocks, bonds, SPCAs (or something), etc.  She watches Oprah one day and decides it would be terribly exciting to start life new so she files for divorce. The kids are adults now so no “child support” to stealthily nest alimony in. They decide not to give a huge chunk to lawyers so they each end up with $500k net to retire on.

Edna’s itching to get her groove back, and sees herself doing the shopping bag strut in the near future.  She remembers something about SPCAs (or something) and wants to convert her half of the money into $2,412 per month in lifetime payments (half of $4,825).  Ed kindly gives her the Easy Quote link.  But when she puts in her birthday and $500k she gets a pleasant surprise;  they offer her $2,577 per month.  She buys the policy and calls Ed up to gloat about her good fortune!  Then she learns that Ed has left on a singles cruise after cashing in his $500k for $3,042 a month!

Why did they each get more separately than 50% of what they would have gotten jointly?

With the joint policy, the insurance company has to pay the full payment so long as either of them are alive.  With separate policies, once one of them passes away the payments for that policy stops.

Why did Ed get more for his $500k than Edna?  Isn’t this a case of the “old boys club” keeping Edna down?

No.   What Edna didn’t understand is that if she had stayed married the odds were strong that she would spend or control more than half of the couple’s retirement assets.  She is younger than Ed, and women typically live longer than men.  If you plug in their sex and ages into this table, you will find that she is expected to live another 23.5 years, and he is expected to live another 16.8.  Since retirement planning is done based on the potential longevity of the longest living member of the couple, the unspoken fact of retirement planning is that husbands are in essence planning for their wife’s retirement.  What Edna got after divorcing Ed is what half really looks like.  Ed was able to spend more after Edna divorced him because he no longer needed to plan for her needs.

Caveats

  1. Inflation: In our example the annuities didn’t account for inflation.  Some insurance companies offer inflation adjustment in exchange for a lower starting payment.  Edna would pay a higher price for this protection than Ed because with her longer life expectancy there would be greater inflation risk to the insurance company.  So if we were to have taken into account inflation the discrepancy would have been even more dramatic.
  2. No one suggest converting 100% of your retirement funds into an annuity like they did. Most financial planners would suggest they start by taking something like 4% of their initial savings per year and then adjusting this amount up for inflation, plus rolling a portion of their funds into SPIAs over time.  This tends to lower initial spending but makes more money available towards end of life for either spending or inheritance.  Since Edna would live longer than Ed, if they stayed married she would likely end up being the one to enjoy the benefits of this.  If they divorced in this situation, Ed might decide to move to a higher SWR rate based on his lower personal life expectancy or bequeath more of his assets as he saw fit.  He would also benefit more from any partial annuitization he chose to implement.  So again, the Annuity model understates the benefit to Edna of staying married.

Note: None of this is intended as financial advice.  If you are interested in learning more about retirement planning, I highly recommend the Boglehead Forum

This entry was posted in Grey Divorce, Post Marital Spinsterhood. Bookmark the permalink.

15 Responses to Shifting financial incentives for divorce as couples approach retirement.

  1. Pingback: Exploding “Grey Divorce” | Dalrock's Blog

  2. dalrock says:

    Still no comments. I hope I didn’t put everyone to sleep with this post.

    I’ll add a quick comment of my own regarding life expectancy. In the example she was expected to live about 7 years longer than he was, and was 5 years younger. Some might notice that this doesn’t match the general statistic that women live 5 years longer than men. The reason for this is the standard longevity stats quoted are for average lifespan of all men and women. But the older you get, the more likely you are to live to be in the upper age range. This is why the tables have entries not only by race and sex, but by age. Men are more likely than women to die in their teens and twenties, and this skews the overall average. By the time a man and woman are both in their 60s, the 5 year total life expectancy gap drops down to about 2-3 years.

  3. J says:

    I actually did find this post interesting, mostly because the hubs and I are facing sending kids to college and then retiring shortly after they graduate.

    Here’s one thing about the man-sphere’s slant on relationships that really bothers me though–the idea that women should be swayed the threat of horrible things that will happen to them if they don’t conform to what men want. At Roissy’s, it’s settle for some beta, tolerate alpha BS, or buy some cats. Here, I think you are close to falling into the trap of saying, “Stay in a marriage or go broke.” In your earlier post on “gray divorce, it was “Stay in a marriage or never be hugged again.” Half of the disagreement from female posters on these blogs comes from that sort of tone and context, rather than the actual content.

    You asked my response to how the media deals with topic of gray divorce. Part of my lost post dealt with how what I’d really like to read, as opposed to all the gloom and doom and exaggeration, is how to make a marriage succeed for 30 or 40 years. Gray divorce is good press; it “sells papers.” But for every couple I see splitting up, I see another that’s doing very well. I want to know what makes a 60-something semi-retired couple jet off to Costa Rica for ziplining and rainforest sex (as did the older couple whose backyard abuts mine did last winter), not why a woman whould stick around for money.

  4. dalrock says:

    I didn’t see your comment until just now. Glad you liked it J. I really do recommend the Boglehead forum for retirement planning. Filled with helpful people who understand more than 99% of the folks with a masters in finance.

    Here’s one thing about the man-sphere’s slant on relationships that really bothers me though–the idea that women should be swayed the threat of horrible things that will happen to them if they don’t conform to what men want.

    Fair point. I think part of the tone is a desire to rework the world in such a way as would benefit men. But I think another part of it is frustration at a tendency of many women (in our time/culture at least) to be in denial of reality. Christian reader developed a fantasy choice between Rocker Bad Boy and Dutiful Pre Med Beta. This kind of thing drives men nuts. How can she not see what she is doing? How come so many other women can’t see this? Just because both motives exist (depending on the author), it doesn’t mean the message is false. I don’t read Roissy because I like him or want to be him. I read him because even when he pisses me off I learn something from him. I’m guessing he wouldn’t want it any other way.

    Here, I think you are close to falling into the trap of saying, “Stay in a marriage or go broke.” In your earlier post on “gray divorce, it was “Stay in a marriage or never be hugged again.”

    I’m trying to point out reality vs the message which is being sold to women in the media. Some women are in marriages so bad they would be better off struggling financially and never being hugged again. I take no comfort from such a sad thought. But I would argue the bulk of divorces don’t fit this mold. I probably shouldn’t care much about the fate of a woman who would divorce because she mistakenly thought she would end up with the better bargain. But I do.

    Aside from not forgiving you for planting an image of old people jungle sex in my mind, I agree with your thought on wanting more focus on how to live a great life. I’d love to see the media or the church even take even a passing interest in such things.

  5. J says:

    Thanks for the info on Boglehead.

    “Christian reader developed a fantasy choice between Rocker Bad Boy and Dutiful Pre Med Beta. This kind of thing drives men nuts. How can she not see what she is doing? How come so many other women can’t see this?”

    I don’t know maybe I’m getting old, but I don’t see alot of women in my milieu doing this. First of all, it’s childish, so I don’t see women my age doing it unless there’s some sort of head problem. The college age daughters of my friends generally don’t behave this way, or, if they do, no one is telling me. There is always, I guess, a number of women who can balance more than one guy. I never could, but I suppose the crew at CR runs into the type of woman who can. If one of my sons came to me with dilemma of what to do with a girl like that I’d say, “Dump her, you’ve got too much going for you to be less than some girl’s sole choice.” Then I’d hope he had enough self-esteem to follow through, but for every girl who loves a cad, there’s a guy who loves a slut.

    Here, I think you are close to falling into the trap of saying, “Stay in a marriage or go broke.” In your earlier post on “gray divorce, it was “Stay in a marriage or never be hugged again.”

    “Aside from not forgiving you for planting an image of old people jungle sex in my mind, ”

    LOL. Hey, even if you can’t forgive, don’t forget. In about 20 years , it’ll be more comforting and less gross. I don’t want to visualize it exactly, but I’m happy it’s there. I hop[e the huibs and I are still going strong at that age.

  6. dalrock says:

    What I meant was how come others couldn’t see that she was creating a fantasy choice. Rocker Bad Boy wasn’t a viable option. He dumped her and she said he wasn’t a viable option anyway. But I’d bet money that if she marries poor pre med beta she’ll have a script in her mind that she gave up true love for him. When the reality is she is the one who stole his opportunity for true love. When I pointed this out to Haley, I get the impression that she thought I grew horns…

    And yeah, good to know that that which we won’t mention will be there in the future. If you are into that sort of thing by the way, you might rent Tailor of Panama. Ouch. Now I have to go floss my brain again.

  7. J says:

    “What I meant was how come others couldn’t see that she was creating a fantasy choice.”

    Oh, I thought you meant the choice was based on a fantasy, not theat the choice itself is a fantasy–and your are very probably right that it is. Yeah, absolutely, that’s a childish thing to do. And you’re right, if she “settles” for him under those circumstances, she is stealing his chance for true love.

    I’ll gooogleTailor of Panama when I get a chance to. I take it that it’s a love story between two elderly people?

  8. dalrock says:

    I’ll gooogleTailor of Panama when I get a chance to. I take it that it’s a love story between two elderly people?

    Yes. Pierce Brosnan and Jamie Lee Curtis.

    Brutal.

    We shall speak of this no more.

  9. J says:

    Great link. Thanks. I am completey unsurprised by the article. This is exactly what see going on around me with older couploes breaking up as the kids leave home. There’s so much said in the manosphere about women frivilously divorcing and abandoning men, but I think a lot of what’s behind the statistics is that marriages simply run out of steam. The sex stops, there’s new nothing left to say, there’s no emotional intimacy. Finally, one party–usually the wife–can’t stand the feeling of living alone with another person and leaves. I’ve taken flack for saying this before, but I’ll say it again–I can’t say this is a tragedy as long as the kids are young adults. On a personal level, having a marriage break up like that frightens me. But being one of those old ladies you see in restaurants staring across a table at an old man who has nothing to say to her also scares me.

  10. J says:

    The reply above is to you. Not sure how it ended up where it did.

  11. Chris says:

    All this depends on where you live, and how vicious the support laws are. It also depends on how many more years you have for retirement, how good a superannuation policy you can get, and what you can earn.

    The state can always take it away… however in these times

    1. Divorce and Marry carefully and reluctantly. A divorce can chew through hundreds of thousands of dollars. A bad choice of spouse sets you up again.
    2. Pay off debts. Mortgages are a debt.
    3. Don’t trade up. it is cheaper to pay for a private school than go into a good district (exception: if the neighbourhood is going feral, sell and move. Take a loss if necessary).
    4. Once you have paid of debt, save automatically — get the pension money deducted first (maximise pension plans while you can).
    5. Aim to do a staged retirement — go part time at 60, keep on working until your health and energy runs out or you are unable to do the job.
    6. Be nice to the kids. It’s cheaper, and the kids remember that, not the gifts you gave them. Be even nicer to the grandkids.
    7. Hard winters shorten lives. Be a snowbird.

    You can then pay for a the snowbird time and grandkid time — and the anti-alzheimer meds. But divorcing and partying through your money will literally kill you. Because the state medical service will not have what you need: the poor (who cannot afford good nutrition, good exercise and good medical care) on average die young.

  12. Pingback: A Beginners Guide to Selling Divorce. | Dalrock

  13. Pingback: How common is late life divorce? | Dalrock

  14. Sarah says:

    I think people didn’t know what to say. I understand what you mean by Edna not thinking ahead. Gee I would have thought at that age Edna would be thinking of taking it easy not getting her groove back. I thought couples were supposed to be reaping the rewards of their retirement not splitting up..

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