May 2001

The Impact of Longevity on Divorce Settlements

As a pioneering culture, Americans revere youth for its energy, vitality and willingness to challenge the norm. Aging was once viewed as a time to step aside, to contract and downshift. But one of the great benefits of entering the 21st century is that we are living longer. With the advance of technology in medicine and greater awareness of healthier living practices, we can expect an extra 20 to 30 years of healthy living. This is good news for those of us who embrace the idea of longer vitality, and plan for the long term.

Unfortunately, when it comes to divorce, our system is too focused on the past model of retirement at 65 and a shorter life span. As a result, many people (mainly women) are living at a much lower standard of living than necessary following a divorce. If attorneys, clients and courts will expand their mindset to accept the concept of longevity and lifelong employment, we might reverse the devastating trend of financial instability following divorce.

People born at the turn of the last century had a life expectancy of 47. They did not expect to live to retirement age. The concepts of Social Security and retirement at age 65 began during the 1930s when there were too many workers and not enough jobs. Work in the 1900s was agricultural and manufacturing based. Workers utilized physical, hands-on skills, and the body wore out after 50 years, making employment at older ages difficult, if not impossible.

A very different workplace exists in the 21st century. In today’s information age our intellectual skills, on which we place high premium, only diminish when the brain is not utilized. We are currently experiencing a shortage of skilled workers, thanks in part to the baby bust in the 1960s and 1970s. People are much healthier in their 50s, 60s, and 70s than ever before, and there are more nonstrenuous jobs from which to choose.

As a result, the way we view work and retirement is shifting to accommodate this new trend. In a survey conducted for the American Association of Retired Persons (AARP), 80 percent of the 2,000 respondents planned to remain employed in their traditional retirement years — one-third for financial need, the other two-thirds for the love of it. Only 16 percent of the respondents in baby-boomer age brackets said they would not work in their retirement years. Four percent said they were uncertain.

In her book Don’t Stop the Career Clock, Helen Harkness suggests that longevity does not mean we will be "old" longer. Instead, Harkness has identified a second midlife, where people will find a second career, explore new hobbies and develop new skills, even into their 80s. Her contemporary model for aging breaks down as follows:

Young adulthood 20-40

First midlife 40-60

Second midlife 60-80

Young-old 80-90

Elderly 90 and above

Old-old 2-3 years to live

The number of people who will achieve "second midlife" is unprecedented. More than 70 percent of the population now lives to the traditional retirement age of 65 — nearly three times as many as at the beginning of the 20th century.

Finally, the responsibility for financing our own retirement is increasing. For more than a quarter of a century, the private sector has been revamping retirement benefits, reducing or eliminating fully paid guaranteed income plans for more portable, cash balance-type investment accounts that are co-funded by the employee and employer. Much more responsibility is being shifted to the employee to properly gauge and fund his or her retirement plans with matching funds from employers.

As a result, fewer workers now earn a guaranteed pension income from the companies for which they work. Moreover, workers now switch employers more frequently than ever before. According to recruiters, in the high-tech industries employees change jobs every year to 18 months. Workplace benefits are now geared more for the flexible, adaptable employee. Relatively few will remain with one employer throughout their working careers.

Despite job opportunities and the apparent willingness of Americans to work longer in life, typical divorce settlements are contributing to the "retirement" mindset and the decline in the financial well-being of post-divorce women. According to research by Christopher L. Hayes, executive director of the National Center for Women and Retirement Research at Long Island University’s Southampton College, 33 million divorced female baby boomers can look forward to a bleak financial future. Hayes’s three-year Baby Boom Retirement Preparation Survey also found:

• 52 percent of American women are not covered by any pension plan;
• The average annual income of women is only $11,000 the year after divorce;
• Nearly 75 percent of all the elderly poor are women; and
• Only 27 percent of women have more than $100,000 in their 401(k) plans, compared with 43 percent of men.

Hayes’s research also found that women are often in a position to see money as a tool to help others rather than to help themselves. They often address their own unique financial issues last, and they are more likely to help put a child through college than invest in themselves.

Complicating the process is the fact that our state’s divorce laws generally have not been updated since 1973. With men and women living longer than they did 28 years ago, the application of existing law has left an increasing gap between the divorce resolution of most marriages and the reality of the underemployed spouse’s post-marriage needs.

A common divorce settlement consists of the courts awarding the wife 50-55 percent of the marital property, which includes the family home with a mortgage. In addition, she typically receives an average of 36 months of maintenance and three years of medical coverage under COBRA. This is often inadequate in meeting the wife’s financial needs and her necessity to establish a career.

Too little thought is given to what happens when the maintenance terminates and medical coverage ends, except that the wife is expected to have a job by then and pay her own bills. This is especially true in mediations when the amount and length of maintenance often becomes an easy target for a negotiated limitation. Some erroneously assume that the lower-earning spouse can afford to begin drawing from investments while the higher-earning spouse does not. In many cases, a premature withdrawal of investments results in a depletion of assets long before the end of life expectancy.

Our state law contemplates that property and liabilities be divided in a divorce after considering "relevant factors" such as the existing community and separate property, the length of the marriage, and the economic circumstances of the parties "at the time the division of the property is to become effective." Other relevant factors include the physical condition of the parties, the age of the parties, and future needs of the parties.

Maintenance may be required as part of the property division or to help one spouse, usually the wife, find gainful employment after a divorce. "Compensatory" maintenance factors in length of marriage and existing community property; "rehabilitative" maintenance refers to funds that will help the lesser-employed spouse fund his or her education and find gainful employment following a divorce. According to the courts, a purpose of maintenance is to support the wife until she is able to earn her own living or become self-supporting. It should also be used to equalize the post-dissolution economic conditions of the parties.

In the past, the courts limited the duration of maintenance so that it would not become a "perpetual lien" on the husband’s future income. This narrow view of maintenance is changing. Increasingly it is viewed as important in the equitable division of marital property. Maintenance should be used as a "flexible tool" in equalizing the future post-divorce economic position of both spouses. It should no longer be acceptable for the courts to focus on money issues and the economic circumstances of each spouse "at the time the division of property is to become effective." This focus is too limited; it does not address the post-divorce economic position of both parties. As our population ages and works longer, emphasis on the post-divorce position is critical.

A long-term perspective may yield a more just and equitable property division. The wife and her counsel should focus on establishing a means of compensating the wife for her contribution to the husband’s future earning capacity, while also evaluating her opportunities and career needs. This might mean providing the wife with a greater share of the liquid assets in the divorce property division, and a stream of income from the former husband by periodic payments under a promissory note or by maintenance (if tax considerations are relevant). Together with the wife’s other sources of income, the objective should be to create equilibrium between both parties’ incomes and their standards of living following a divorce.

The law of this state requires an "equitable" division of property. It also requires that the division be "just." In these circumstances, it is only "just" that the former spouses enjoy roughly equal future standards of living. Where necessary, the courts should use whatever "flexible tools" they have to protect the longer-term economic interests of both the husband and wife.

The following case study illustrates the impact of two possible property division and maintenance arrangements for a fictitious couple who have a typical divorce scenario. If we attempt to leave both spouses in "roughly equal" economic circumstances after a long marriage, what does it take?

Sara and Jeffrey Bennett have been married for 25 years. Sara is 50 years old and Jeff is 52. Sara is self-employed as a horticulturist and grosses approximately $19,000 per year. Jeffrey is an engineer, works for a large aerospace company, and earns approximately $79,000 a year. He has a master’s degree in engineering. Sara has a bachelor’s degree in art and a certificate in horticulture.

They have two children, 21-year-old Gretchen, a senior in college, and 17-year-old Jason, a high-school senior. Jason will be attending a local community college for two years following high school. The Bennetts’ home has a current market value of $300,000, with a mortgage balance of $115,000, and a principal and interest payment of $800 per month. They have stock and bond investments of $50,000, and Jeffrey’s 401(k) account is worth $250,000. Jeffrey’s employer also sponsors a defined benefit pension plan that has an accrued monthly benefit of $800 a month.

Jeffrey has medical insurance and a car allowance paid by his company. During Sara’s career retooling, she will bear medical and transportation costs herself. In addition, Sara feels strongly about assisting Jason through college as the couple did for their daughter. In view of the divorce, Jeffrey prefers to see what the settlement means to his financial security before committing to funding college costs.

Sara must complete a two-year degree to achieve her goal of becoming a graphic artist. The first phase of meeting her goal includes two years of classes at a local community college (2001-2003). For the following three years, she will need time to develop her reputation and credibility in the graphic-arts field.

Sara’s educational costs will include $3,600 for tuition and $4,000 for a computer, programs, books and supplies — a total cost of $7,600. In 2003, she may earn approximately $24,000; $26,400 in 2005; and $29,000 in 2006. After five years’ experience she might earn $3,300 a month or $39,600 a year.

This settlement is a common but inadequate outcome. If the Bennetts’ property is divided with 55 percent to Sara, and Jason resides at home through his years at community college, Sara will receive $185,000 in home equity, $82,000 in 401(k) funds, and $4,000 in a savings account. The couple initially assumes they will split the pension equally. Jeffrey will receive one-half of the accrued pension, $168,000 in the 401(k), the stock portfolio of $50,000, and a few thousand dollars in a checking account. Child support from Jeffrey is calculated to be $1,035 per month until Jason turns 18, at which time Jeffrey will continue to pay $500 per month for transportation expenses, insurance, and tuition assistance for Jason for four years. Maintenance of $1,900 per month before taxes will be awarded for four years.

In the first year, Sara covers her and Jason’s expenses under this arrangement. She is able to set aside $250 per month that will eventually cover about 40 percent of her tuition. However, when Sara begins her full-time education program, she will still have to work part-time in addition to receiving maintenance. Even with part-time work, her expenses exceed her income by $900 per month for the 18 months she is in school. We anticipate Sara will be employed by June 2003, at a starting level salary of $24,000. Even when including additional income of $600 per month from renting a room in her home after Jason leaves for college, Sara will face monthly shortfalls of $300 to $700 per month until year nine. If a home-equity loan is used to meet these monthly shortfalls, her debt will increase to $27,000 over the course of nine years.

In this scenario, four years of maintenance is insufficient to meet Sara’s needs. Even with a renter to supplement her income, Sara does not have the means to save additional funds for retirement within the 10 years following her divorce. Selling the house and occupying a condominium will not greatly reduce her expenses. Sara will see that her financial ability to assist Jason, beyond providing a room, is out of the question. She will be taking on her own debt as she completes her education and starts her career.

Jeffrey Bennett will have a financially restrictive situation for the first 12 months following the divorce ($2,300 per month in net income), paying $1,035 in child support and $1,900 in maintenance ($1,400 after the tax benefits). However, in year two his net income adjusts to $3,000, with child support/college assistance changing from $1,035 to $500 per month after Jason turns 18. By year three, assuming a 3.5 percent increase in earnings each year, Jeffrey Bennett could conceivably purchase a residence, placing him in a similar housing situation as Sara. By year five, with maintenance no longer being paid, his net income is high enough to meet expenses comfortably and resume saving for retirement. Contributing to his retirement plan will generate another $2,500 in matching contributions from Jeffrey’s employer. Sara will likely have some matching feature with a future employer, but she does not have the discretionary income to defer until year 10.

Pension incomes at age 65-66, excluding income from investments, are estimated to be as follows:

                                       Jeffrey                 Sara

Pension*                         $1,194                 $439

Social Security               $1,400                 $900

Total                               $2,594                 $1,339

(*50-percent of marital years awarded to Sara)

Using similar returns on assets and living standards for each spouse, with the pension income noted above, assets for each spouse grow or diminish over time. The spouse with higher compensation continues to accrue financial security at a much greater pace, due to higher pension and Social Security benefits, and an ability to save income for retirement. Jeffrey’s assets will also last much longer (through age 95) than Sara’s. In 1970, life expectancies were much lower and there was less risk of someone outliving their assets. Today, we expect half of the white female population to live beyond age 87. Sara faces financial risk of outliving her assets by age 86. After a 25-year marriage, this divorce settlement is not financially equitable.

Alternatives to the original scenario create greater economic "balance" between the parties. Four years of additional maintenance of $1,600 per month, a 60 percent allocation of investment and real estate property, plus 55 percent of the currently accrued pension will provide greater equity to Sara, and leave Jeffrey with a much greater pension benefit, with an increasing portion coming from future service years.

While this revised settlement still does not quite create "economic parity," Sara and Jeffrey can reasonably expect their assets to meet their needs to ages 90 and 95. Sara’s financial situation still includes receiving rental income, while Jeffrey’s does not.

As the case study illustrates, the financial alternatives and career decisions our clients make during their divorce will affect their lives well into their 70s and 80s. Long-term planning will help them embark on financial healing while they recover from the emotional injury of divorce. While we know that fear of the unknown paralyzes many financially uninformed spouses, the ancillary benefits of meaningful work may promote the mental engagement for a vibrant and vigorous old age.

Since we are living healthier and longer lives, we have to embrace the consequences of longevity — understanding that work does not necessarily end at age 65. Furthermore, we must break financial dependence on Social Security and company pensions.

This is particularly true for the spouse who is underemployed or who has to re-enter the job market after a divorce. This person faces the reality that he or she may not only have to work longer, but must develop skills that provide greater earnings potential and support in the short and long term. In this information age, the courts and our clients need to acknowledge that continuous education and skill development together with a just divorce property settlement is the best avenue for long-term security.

To achieve more equitable results, we need to aid our clients (as well as opposing counsel and judges) in seeing the big picture, especially one that projects into the future, emphasizing career development as a personal and financial investment. And, we must counsel our clients about the benefits of longevity and the unique opportunities for work past the traditional retirement age.Camden M. Hall is a member of the Seattle law firm Foster Pepper & Shefelman PLLC.  He focuses on complex business and family law disputes and litigation, alternate dispute resolution, media law and appellate work.

 Janice E. Reha, owner of Career Discovery in Bellevue, is a mental health career counselor specializing in vocational expert services for marital dissolution.

Lisa R. Peters, a principal of Advantage Financial Group, Inc., has provided general financial planning and investment advisory services for over 15 years to individuals going through divorce.

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