July 2006

A New Era Deserves a New Divorce Model

Achieving equitable divorce settlements means understanding modern social and economic trends

by Janice Reha and Kathleen Miller

Two-and-half decades ago, the United States was at the tail end of the Manufacturing Age. At that time, most people worked in one company for the duration of their work lives. During the height of the Manufacturing Age, one person (usually male) could support three or four other people in a household. Women traditionally raised children and kept up the home. If they did work outside the home, it was generally in lower-paying jobs than their husbands. For example, nearly half of women graduating from college in 1960 became teachers.

Twenty-five years ago, life planning was simple and much more defined in linear terms. In 1978, author Richard Bolles defined life planning in his popular book Three Boxes of Life in terms of education, work, and retirement. Times have changed dramatically. Education, work, and retirement may remain the pillars for life planning, but the lines of the boxes have blurred as society and the economy have become more complex than ever before.

Today, the United States participates in the Global Age. Technology has produced new occupations, many of which have no defined titles. People change jobs seven to nine times in a lifetime due to restructuring, technology, and economic concerns. The United States has moved from a more predictable, consistent workplace to one that is constantly forming, dismantling, and reforming to compete internationally. Yet, we are still using the same mindset of 25 years ago when addressing divorce and implications of dividing property. This macro shift requires a new, more dynamic, multifaceted, and individualized model for divorce settlements that reflects current social and economic trends.

New Era = New Model

Our colleague Hank Fields points out in his article in this issue of Bar News that the courts have for too long applied a one-dimensional model for maintenance awards and property settlements. The courts tend to base these settlements on the assumption, often false, that both spouses can be equally self-sufficient. In reality, marriage creates economic inequality. Consider the following research:

• Mothers typically experience a sharp decline in economic status and often descend into poverty with their children following divorce. Nearly 40 percent of divorced mothers are poor. And even if the children of divorce do not end up in literal poverty, they are less likely to reach their parents' social and economic level or obtain a college education (Unbending Gender: Why Work and Family Conflict and What to Do About It. Joan C. Williams, American University, 2003).

• Women who interrupted their careers or were full-time homemakers and didn't create their own retirement accounts, and are divorced at an older age with a longer life expectancy, often have inadequate financial resources during the most vulnerable time in their lives.

A new divorce settlement model needs to focus more on the division of income for a longer period of time, taking into account the career assets rather than simply the length of marriage. To divide marital property equitably, the major breadwinner's career and the associated earnings that go with it must be acknowledged as property by the courts. Assets including salary, stock options, health and disability insurance, vacation and sick pay, education, and potential earning power are all assets that were earned during the marriage and should be accounted for during a divorce settlement.

Of course, assessing the economic value of career assets and forecasting their value to both parties is a much more difficult task than simply applying a length-of-marriage test. Under this divorce settlement model, every divorce negotiation requires a unique and innovative approach, given the career and economic circumstances of the parties involved.

It also requires a more sophisticated understanding of the employment, retirement, and investment trends in the 21st century workplace and economy. Our goal is to outline some of the driving social and work trends of our time, and illustrate through case studies how understanding the trends can help divorce attorneys deepen their ability to represent their clients and lead to more equitable settlements for both parties.

Social Trends

Despite a growing female workforce and increased education, women are still at an economic disadvantage when compared to men, particularly following a divorce. The divorce rate has not declined, and multiple marriages mean more divorces. According to the Journal of Family Issues, approximately 50 percent of first marriages for men under 45 may end in divorce. Between 44 to 52 percent of women's first marriages may end in divorce by this age. There is also research indicating that people in second and third marriages are even more prone to divorce.

As a result, many women enter their senior years divorced. For women who were born between 1951 and 1955, a projected 20 percent will be divorced by age 67, according to a study published by the University of Michigan ("The Economic Status of Elderly Divorced Women," Michigan Retirement Research Center, University of Michigan. Hiader, Jacknowitz & Schoeni, May 2003).

Meanwhile women (and some men) continue to interrupt careers to raise children. Roughly one in three U.S. children under 15 has a mother at home full-time, whereas less than one percent of men are stay-at-home parents. Among male managers and professionals who are working, more than one in three work 50 or more hours a week in order to advance their careers. Ninety-five percent of mothers work less than 50 hours per week during the key career-building years, because those are also the key child-rearing years.

This leaves mothers facing unattractive choices: remain in a job that keeps them away from home 10-12 hours a day, or work part-time with depressed wages, few benefits, and no advancement. Ultimately, many are finding the work/life balance too difficult to obtain, so they quit their jobs.

Women also are at a disadvantage when it comes to saving enough for retirement. Social Security is still a mainstay of their financial security. Women earn less than men, save less than men, and are less likely to have a pension than men — but are likely to outlive men. Earnings are what make retirement savings possible, and these earnings are the yardstick used to calculate Social Security benefits. With a history of unemployment or underemployment, women are stuck in a cycle where they will have less Social Security and retirement income and yet have a greater need.

Workplace Trends

Outsourcing of jobs from the United States is accelerating. According to Outsourcing Times newsletter, 406,000 U.S. jobs were outsourced in 2004. This acceleration is expected to continue for years to come. Job losses also have occurred due to mergers and acquisitions, many of which have occurred in Washington state where the unemployment rate has been one of the highest in the nation.

Meanwhile, the weakness in the labor market means growing numbers of temporary jobs. Temporary staffing practices that were considered temporary fixes in the early 1990s are now commonplace in many businesses, according to Peter Cappelli, of the Wharton School of Business in Philadelphia. Cappelli's research shows there are 24.2 million part-timers in today's workforce of 131.5 million people, up from 23 million when the expansion began in November 2001. The number of temporary workers, meanwhile, rose by 309,000, to 2.6 million. These "just-in-time" practices make it easier to hire and fire, saving employers the cost of paying healthcare and other benefits of full-time employees.

Health-insurance benefits also have decreased in coverage. Employers are transferring more of the costs of healthcare to the individual worker, including the premium cost and payment of out-of-pocket expenses and prescriptions.

Another trend, which becomes more apparent when job loss occurs, is the increase of small businesses or self-employment. According to the Small Business Administration (SBA), small firms employ half of all private-sector employees and generate 60 to 80 percent of new jobs annually.

Also, a declining proportion of workers can count on defined-benefit payments to see them through lengthy retirements. Pensions are being replaced with self-funding plans, such as 401(k) plans that may have a profit-sharing or matching component. The risk of the investments has been transferred to the employee from the employer. The problem is that many people mismanage these assets.

The soaring stock market of the late 1990s lulled many workers into complacency with regard to saving in their 401(k) plans for retirement. The bull market of the 1990s fueled a crazy kind of optimism regarding retirement, but the first four years of the millennium offered the first back-to-back declines of the S&P 500 Index since 1973-74. Those invested heavily in technology and the stock market in their 401(k) plans have seen the erosion of 50 to 70 percent of their retirement savings. The decline in stock prices then, and the outlook for only modest returns going forward, have caused baby boomers and other workers to reassess whether they really have enough saved for retirement. Most have not. With job security and benefits less concrete than in the past, divorcing parties need to realize that the income they relied on during their married life is more at risk than ever before.

Longevity Trends

The American worker is aging, and life expectancy continues to increase the danger of outliving one's asset base. For many years, the economy, pension plans, and the government supported the concept of a mid-60s retirement. But over time, demographics, economic forces, and divorce will make this standard harder to achieve, leaving it increasingly up to the individual to build a nest egg large enough to avoid the late-retirement trend.

In 1940, when Social Security was initiated, the average life span for a male at 65 was 77.7 years; today it is greater than 80. The average life span for a 65-year-old woman in 1940 was 79.7 years, and in 2004 it was nearly 84, according to the Social Security Administration. As a result, the government is enacting pension reforms. It is delaying the age at which one can receive full Social Security benefits and Medicare, sharing Medicare premium payments between the government and the retiree, increasing the restrictions with Medicaid, and encouraging the older worker to self-fund and stay in the job market longer.

Demographic changes also will drive up the cost of home healthcare. The number of people needing help from family caregivers is expected to skyrocket in the next few decades. Leading the change will be the baby boomers looking for help with their parents and, later on, for themselves.

Retirement Trends

As the fear of being broke in the later years increases for today's mid-career workers, the genesis of a solution is emerging: Many baby boomers simply won't retire or will retire later than they expected to. For many decades, rising affluence allowed the average age at retirement to fall. Since the mid-1980s however, this trend has reversed, with the labor-force participation among older American workers rising dramatically.

In 1984, just 27 percent of the income of people aged 65 to 74 came from wages and salaries. By 2002, this had jumped to 37 percent. This surge in the older work force has continued unabated in the last few years, even as other age groups have pulled back from the labor market in reaction to a sluggish economy.

More importantly, companies will need to utilize baby boomers, due to their growing number in the population and the much smaller number of younger people who follow them. The exodus of baby boomers will start in 2009, when the oldest of the group turn 63. As there will be a dwindling number of younger workers, there will be fewer workers to fill jobs, and there will be more job opportunities for older workers in the workforce.

The implications of these work and aging trends are several. First, divorce attorneys and their clients need to become better at estimating how much they will need in retirement, based on how long they expect to live. Workers facing much weaker job security than ever before need more education and flexibility in career choices. They will also need to take a closer look at their medical expenses and long-term care, as well as any obligations they may have to care for aging parents. Most divorcing spouses will not have any choice — the majority of them will need to work longer to pay for the costs of dividing the household assets and income as well as supporting their children.

Housing Trends: Sell the Family Home?

This area of post-divorce financial planning warrants particular attention, because it is a flashpoint for tension and controversy. For most married couples, the family home is the highest valued asset they will divide in their divorce. Its division is usually fraught with controversy for various reasons — it is difficult to value, is not readily converted to cash, costs a substantial amount of money to maintain, and has federal- and state-tax liability implications. Add to that all of the emotional attachments.

Home prices nationwide have climbed an average of 40 to 75 percent in some areas over the past five years. Homeowners have tapped into low-interest home-equity loans to take vacations, remodel, purchase second homes — even for cash. Many banks have allowed homebuyers to get loans when their mortgage payments total as much as 50 percent of their monthly income, up from the more customary limit of about one-third in past cycles. This debt eventually needs to be paid off. And if the home equity has aggressively been tapped, there is less to divide between the spouses at the time of divorce.

Often, the spouse who gets the house can't afford to maintain it. This is known as being "house poor." Child support and maintenance can help for a time, but if all of the money is going into the house and little to savings and to a career plan, the end result is not good. This often leads to a poorly maintained home and a loss in the value of the equity. It can also result in an overall reduction in the standard of living of the owner if the money is diverted from personal uses to the home's upkeep. Too many times, clinging to the family home means delaying education for career advancement and not saving for retirement. Downsizing at the time of the divorce and investing in a career plan may be emotionally painful, but is often the best long-term decision for financial security.

Securing an Equitable and Stable Post-Divorce Life

The two case studies that follow this article were developed with the help of attorney Hank Fields. The studies are representative of the complex social, financial, and career situations we are seeing in modern divorce cases. Under the old model, length of marriage and age were given the most weight. A modern settlement should bring greater balance, yet address the unique circumstances of each couple. Each scenario considers:

• Salary and wage information

• Education levels

• Occupational choices and trends

• Age

• Dependent children

• Length of marriage

• Remarriage patterns

• Longevity

Each scenario is also tailored to the individual needs of the divorcing couple. The cases show how — with the help of a team including an experienced divorce attorney, a career counselor, and a certified financial planner experienced with divorce cases — the parties can achieve an equitable settlement that is fair to both and meets the needs of their children as well.

As our society continues to change and evolve, we must broaden the way we look at divorce and the financial implications for all parties involved. Our hope is that attorneys and their clients will realize that equitable divorce settlements can be achieved for both parties when they are willing to address the significant social and economic changes of our time.

Janice Reha, CMHC, MA, has provided career services to companies, colleges, and career changers for over 27 years. She is a cofounder of Puget Sound Career Development Association. She can be reached at jan@careerdiscoveryinc.com.

Kathleen Miller, CFP, MBA, is president of Miller Advisors, Inc. For more than 25 years, Kathleen has specialized in helping clients solve a diverse set of financial problems through integrated tax, retirement cash-flow strategies, and estate planning. Kathleen is a member of the Financial Planning Association and Institute for Divorce Financial Analysts.