When husband and wife divorce, even the “best” lawyer, mediator, judge or financial advisor is up against formidable odds in calming the inherent tension that exists when a former couple are now fighting over conflicting financial interests.
Some couples, especially those who manage to focus on their common interests in promoting the welfare of their children, have perhaps better odds of an amicable separation.
And a growing movement toward what is called “collaborative divorce” — in which the parties contract to maintain a transparent process involving neutral financial mediation and a divorce therapist to keep emotions under control — is starting to make headway.
But even these optimal cases run into the reality of financial lives involving complex variables such as individuals with different incomes, ages, houses, pensions, health status and more.
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A well-meaning advisor with a good financial calculator may be insufficient to the task of equitably addressing these multiple moving targets. More in order would be a PhD in finance using powerful software capable of integrating retirement, tax, college, insurance, housing, Social Security, investment and career variables both to crunch the data and to make sense of it.
Fortunately, such a solution now appears to be at hand with the launch of Fair Divorce Decisions by Laurence Kotlikoff.
The Boston University economics professor and personal finance maverick, who has spearheaded a variety of services for perplexed consumers, including $40 advice in the complex area of Social Security claiming strategies, now wants to help divorcing couples wrap up a fair arrangement for just $500.
Intensifying the bitterness of divorce is that “both sides think they’re right; that’s why these arguments are so fierce,” Kotlikoff tells ThinkAdvisor in a phone interview.
“They can’t possibly know how to assess the impact of Medicare Part B premiums, 529 plan fees, money from grandparents,” he adds. “By using our solution, it becomes much more of a scientific answer rather than a bloodbath.”
To the extent possible in a situation involving the breakup of a marriage, the result can be a win for both parties, as well as for any of their advisors.
“We can be an effective back office for advisors,” says Kotlikoff, whose software produces an initial four reports for $500, charging $125 for each additional report that is desired.
“Let us do the analysis and they can start the conversation with clients,” Kotlikoff says, adding that “those clients are still going to need financial products, annuities” or other services. “We don’t give investment advice.”
But given the sheer number of divorces and the diversity of families’ financial situations, a high proportion of advisors’ clients are likely to need an objective look at the financial impact of their divorce under different scenarios, which is what Kotlikoff’s software aims to do.
It can run numbers based on a settlement involving a lump sum payment with no alimony, or alternative scenarios involving lower or higher alimony payments.
“We do the calculations for them using our software to evaluate different divorce settlement options and suggest things that are fairer,” he says.
As an economist, Kotlikoff’s core assumption about fairness revolves around consumption. His software looks to equalize both sides’ ability to spend now and in the future and aims “also to optimize their pot of resources by using the best Social Security strategy and minimizing their taxes.”
Kotlikoff illustrates with a real example he recently observed involving a wife with fewer resources than the husband, who is proposing she take a certain settlement:
“He’s retired, she’s working the next five years; he doesn’t want to work or provide much in assets. How much alimony is needed to be equal? In looking at it, it became clear that it would be more tax-efficient for both of them for him to basically pay the taxes … If he hands over alimony, they have the option to make it excludable in his [adjusted gross income] or taxable to her or not; it turns out that in this case, somewhat surprisingly, it’s better for it not to be excluded.