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For Better or Worse, in Sickness and in Health, till Death or Divorce Do Us Part
The chance of marriage ending in divorce is over 40 percent. Since two thirds of us get married, divorce is far more common than it seems. Here’s an excerpt from my book, Money Magic, that gives you a sense of why the song, Love Is All Around Us, I Feel It in my Toes, deserves a sequel — Divorce Is All Around Us, I Feel It in My Nose.
Count from 1 to 13. By the time you reach 13 another marriage made in heaven will have hit the dust. This rate of conjugal disunion translates into almost 300 divorces per hour, over 6,000 divorces per day, close to 50,000 divorces per week, and almost 2.5 million divorces per year.[1] Roughly half of U.S. marriages end up on the rocks. And Oscar Wilde got it right: we don’t get better with practice. The divorce rate for second marriages is 60 percent. For third marriages, it’s 73 percent.
Given these astonishing figures, it’s amazing that no one, at least at the outset, thinks it will happen to them. Ask any couple on their wedding day if they expect to get divorced. None will say yes. Economists call this irrational expectations – when people collectively believe something they know isn’t collectively true. Irrational expectations abound in all areas of life. Question freshman about their expected college GPA. As a group, they’ll expect to do better, on average, than the college norm. Ask stock investors the return they expect to earn. Their mean answer will exceed the historic average. Ask Americans if they are smarter than average. Two thirds will say yes.
Divorce War
Key data on divorce are unavailable. In particular, we don’t know what fraction of couples that split do so in the context of a horrific fight — one that leaves children permanently estranged from their fathers, mothers, or both.
Lots of divorces occur within a few years of marriage. Other people wait decades to call it quits. Remarkably, many couples divorce in their sixties, seventies, and at even older ages. Maybe they wait till their kids are settled or maybe they get the seventy-year itch or maybe they wait until they can afford it. Divorce comes at a major cost — loss of economies of shared living, particularly needing to pay for two homes. As couples age, each spouse approaches game over, so “I’m out-of-here” becomes more affordable. Also, differential life expectancies lowers the expected duration of shared living and the expected cost of one party realizing the inevitable — singlehood — early.
Of course, remarriage can preserve marriage economies. Baptist Minister turned barber, Glenn DeMoss Wolfe, holds the Guinness World Record for marriage. He divorced roughly 25 times, but married 31 times. (Some wives died on his watch.) His shortest marriage lasted 19 days; the longest 11 years.
There are many reasons for divorce. Infidelity and sexual incompatibility are two biggies. But financial disagreements play a major role. They not only cause breakups, but also often lead to massive fights when it comes to reaching a settlement. That’s when the parties resort to divorce lawyers, who invariably encourage their clients to go for broke. Of course, the longer the “couple” fights, the larger the fees.
There are endless financial particulars over which to fight.
Your Social Security will be larger than mine!
You’ll be collecting a Social Security spousal and, likely, a widows benefit.
I’m younger, I need to sustain myself for longer.
You smoke like a chimney. Have no fear of tarrying.
I’m earning more and face higher taxes.
With privilege comes responsibility.
You’re moving to Las Vegas and Nevada has no state-income tax. I’m stuck working in LA and California’s state income tax is confiscatory.
The take at the casinos will even things out.
The kids are living with me and they’ll cost far more than the child-support formula specifies.
Well, yes, we’ll need to address this.
Your retirement accounts are tax-free Roths. Mine are taxable 401(k)s.
But your accounts are much larger and your employer’s contribution is sizable.
I’m working far more hours and far harder.
You enjoy your work. I hate mine.
You want to keep your car, but it’s brand new and four times the value of mine.
But the upkeep is huge.
Add another 100 examples, but ratchet up the anger.
Divorce Wars I’ve Witnessed
The screaming, lawyer fees, depositions, exchange of documents, court appearances, anxiety, depression, you name it, associated with fighting over finances as well as everything else — it’s all terrible for spouses who are grieving the death of their imagined perfect relationship. It’s especially terrible for the children of these waring parents. They get transported to a war zone, with two parents at each others’ throats — each blaming the other for the divorce and painting the other as the villain to whom the children should never speak or, at least, not trust.
In my day, four sets of close married friends have gone to divorce war. One divorce continued for a decade as the wife repeatedly hauled the husband into court to pay more alimony. This fight wasn’t only about getting money. It was also about getting even. Anger was all around them, they could feel it in their bones.
One of my four sets of couple friends spent hundreds of thousands of dollars on attorney fees — money they couldn’t afford to burn. Better they had given it to their kids. Two of the four wives settled “amicably” without contesting the husband’s proposed settlement. But signing divorce papers didn’t sign away the anger. As a result, the children have limited contact with their fathers.
Economics Can Help
Economics has a simple formula for achieving an amicable or, at least, less hostile divorce. Forget all the financial details. Just sit down with your future ex and agree on a single number — the ratio of your two sustainable living standards under the divorce settlement.
If you’ve been married for 30 years, you might agree to have the same sustainable living standard, i.e., a ratio of 1 to 1. If you’ve been married 30 days, the solution is likely to simply walk away and proceed as if you’d never been married. The living-standard ratio, in this case, is effectively based on your living standards before you said “I do.”
What if you’ve been married for 15 years? Also assume you work 60 hours a week in an extremely stressful job whereas your spouse works 30 hours a week in a fun job. In this case, the two of you may decide that your living standard going forward should be, say, 25 percent higher, i.e., a living standard ratio of 1.25 to 1.
Of course, the living-standard ratio on which you settle will, to some extent, reflect your grievances. If one of you cheated on the other, the cheater may accept a somewhat lower ratio.
Yes, this sounds ultra rational, antiseptic, and naive — just what one would expect from an out-of-touch economist. But here’s the thing. Every divorce settlement entails a living standard ratio. How so? Because every divorce settlement leaves each party with a particular sustainable living standard and one can calculate the ratio of the two living standards.
Divorcing spouses can spend a ton of time, money, and emotion arguing over the allocation of each and every asset and each and every source of income. Or they can focus on the only thing that really matters, apart from custody of children, namely their living-standard ratio. Moreover, no single issue can be resolved in isolation. Each issue has to be considered in light of the overall deal. Hence, economics says focus on the bottom line.
The Divorce Settlement Game
Yes, lawyering up may convince your worse half that you’re no pushover. But threatening to do so should suffice to convey that message. In the end, whatever guilt trip you can lay on your spouse, legitimate or not, and whatever bargaining power you hold, i.e., credible threats, including turning your children against them — they can all be used to bargain for a higher ratio.
Another key element in the bargaining is the customary alimony provisions in the state where you reside. Although relatively few divorces go to trial, what a judge would likely decide conditions your threat points, to use a term from game theory, and should be kept in mind in your negotiation.
In short, if you are going to argue, have one argument, not one hundred arguments. And in that argument, hopefully a heated discussion if not a peaceful exchange, lay out all your cards, including all aspects of your threat point — what you’ll do if you don’t reach agreement. In having this sit down, I suggest excluding lawyers. They will only exacerbate acrimony. There is no need for lawyers apart from learning your legal rights in advance of negotiating with your other half. If your opposite has a dominating personality, i.e., a screamer, discuss your ratio via email. You may be surprised how easy it is to reach agreement. Discussing something that neither of you has considered means there are no dug-in positions.
Once You Choose a Ratio, Divorce War Ends and, Amazingly, You Join Sides
Suppose you both realize, at the get go, that no matter how long you fight and how much you pay attorneys, you will ultimately end up with a ratio — one that you can just as well choose now rather than later.
Assuming you agree on a ratio, what’s next? Simple. You each shell out the massive sum of $109 to purchase the basic version of MaxiFi Planner and run yourselves as single, but divorced. In running your versions of MaxiFi, you enter your resources post divorce. MaxiFi will ask about all retirement accounts, pensions, future labor earnings, retirement dates, regular assets, birthdates, presence of children, etc. You both need to enter consistent information, e.g., you split proceeds from the sale of the house plus all non-retirement account assets.
As long as you make the common assumptions within each iteration of the process, the starting point doesn’t matter. So, Step 1 is to run each of your plans with mutually consistent inputs. Step 2 is to compare the living-standard ratio across the two plans. Step 3: If the ratio doesn’t correspond to your agreed target ratio, which it surely won’t on first pass, try different divisions of assets, including retirement account assets, and or levels of alimony/child support (above what the state requires) to close in on your target.
Note that all the tax and benefit issues, including all of the other issues raised above, are fully incorporated in MaxiFi’s calculations. If, for example, one of you will have custody of the children, the program take into account the costs of providing them with the same living standard that you enjoy until they, say, go to college. Or if one of you is younger than the other, MaxiFi will realize that even with the same resources, the younger of the two of you will have a lower living standard. Why? Because the same resources need to be spread over more years.
Step 4: Repeat Step 3 until you achieve your ratio. Step 5: Use MaxiFi’s robo optimization to optimize each of your plans over Social Security collection, Roth conversion, and non-Roth withdraw start dates. This will move you away from your target ratio. Step 6: Adjust your resource sharing to hit your target.
Note that since your living standard ratio is set, anything that one party does to improve their plan, like taking the right Social Security benefits at the right time, ends up benefiting the other party. Having decided how to divide the pie, you both want to maximize the size of the pie. I.e., you find yourself on the same page working together, not calling each other names.
Other Considerations
Your relative living standard isn’t the only issue of financial importance. One or both of you may end up cash-flow constrained — with a lower living standard in the near term and a higher living standard in the future. In this case, your ratio should be measured based on your relative average lifetime living standard. But if one party is far more constrained than the other, the less constrained party should provide resources early on to achieve the living standard ratio on an annual basis, not just on average, over your lifetimes.
Risk
Life is uncertain. How long each of you will work, how much you’ll earn, what your healthcare expenses will be. The list goes on. In getting divorced, you are trying to make a one-time deal so that each of you can proceed to get on with your lives and not have to worry that earning extra money will need to be shared with your ex. In running MaxiFi, enter conservative/risk-adjusted/certainty-equivalent inputs. If you hope to work till 70, but will most likely retire at 65, enter 65. If you think your real wages will rise over time, assume they will stay fixed in today’s dollars. Both spouses should make the same conservative assumptions. As it is, the program has conservative default assumptions about maximum age of life and the real return on investment. The maximum age of life is defaulted to 100 and the real return is defaulted to the real yield on 30-year Treasury inflation-indexed bonds — TIPS, which stands for Treasury Inflation Protected Securities.
Exceptions
Ideally, the party owing money can immediately pay off the other what’s needed to achieve the targeted living-standard ratio. But with younger couples, the payoff may, for liquidity reasons, need to arrive through time. Clearly, if the payee’s wages fall dramatically, the deal will need to be re-examined. Provision for adjusting one’s divorce settlement under extreme circumstances can be part of the agreement. But, again, the goal is to permanently separate to the maximum extent possible. Otherwise, each party will be reluctant to earn more income since a portion of any extra income will be paid to their ex. Hence, the extreme circumstances should be extreme.
Remarriage
Some states condition receipt of alimony on staying single. This is not something economics suggests should be part of a divorce agreement. Divorcees should be free to make all future economic and personal decisions without facing an implicate tax on those decisions. This said, the likelihood that someone will remarry can enter into the negotiation of your living-standard ratio. Hence, if your spouse has run off with, say, an heiress, negotiate for a higher ratio. But realize that nothing is for sure. The heiress may dump your spouse in short order. So, make a deal that feels fair and reasonable given your constraints, including what the state courts would determine. At that point, it’s best to move on. The past is history. The future alone holds promise, including the promise of children that aren’t permanently scared by your divorce.
If You Need Help
I’ve worked with a number of couples helping them use MaxiFi to determine a reasonable divorce agreement. If you’d like to engage me to help you in this regard, please sign up for my MaxiFi with Larry service by clicking here.
Related: Why Borrowing for College Could Cost You More Than You Think