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.
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.
- 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.
- 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