Does It Pay to Get Divorced?

Kathy and Frank are going through a rough patch and are thinking about getting divorced.

The Facts

Married couple, Age: 52 and 45
Frank's earnings: $750,000
Kathy’s earnings: $0

Frank's 401K: $1.5M
Kathy's retirement saving: $0
Joint savings: $500,000

The Base Plan

Kathy, age 45, and Frank, age 52, are going through a rough patch and are thinking about getting divorced. The couple lives in Kentucky with their 10 year-old daughter, Samantha, and their 15 year-old son, Victor. Frank is a well-paid cardiologist who earns $750,000 per year. He has a $1.5 million 401(k). The couple has a $500,000 joint savings account and owns a $2 million home with a $1 million mortgage. Kathy worked in the past to put Frank through medical school. But once Victor arrived she became a full-time mom. Consequently, she has no retirement account assets. She has found a part-time job paying $25,000 and expects to work full time (doubling her salary) when Samantha heads to college. Going forward, both Frank and Kathy’s employers will contribute 3 percent to their 401(k)s – matching Frank and Kathy’s own 3 percent contributions. The couple plans to spend $75,000 in today’s dollars on each child for their four years of college.

They’ve used MaxiFi to calculate their future living standard if they stay together. The answer is $82,190 per person – this is discretionary spending per household member adjusted for economies in shared living and the relative cost of children.

Frank and Kathy’s Living Standard If They Divorce

To understand their living standard if they divorce, Frank and Kathy use Analyze My Divorce Settlement (AMDS), a sister program to MaxiFi. It compares the sustainable living standard of each spouse under any specified divorce settlement.

In running AMDS, Frank and Kathy specify a 50-50 split of their assets, a 50-50 split of the proceeds of the sale of their house when it’s sold, child support from Frank to Kathy based on Kentucky State’s guideline. The guideline calls for a $1,849 monthly payment when both children are at home, falling to $1,199 after Victor leaves home. Finally, they set Frank’s alimony through retirement at 65 at $74,495, which is what’s needed to equalize both of their living standards going forward.

To their dismay, AMDS produces an annual discretionary spending level of only $61,594 per person. That’s a 25.1 percent reduction compared to staying married!

The living standard drop reflects three factors, one of which goes in the opposite direction from the other two. First, if they divorce, they lose economies of shared living; i..e, the fact that two can live more cheaply than one. MaxiFi assumes that 2 can live as cheaply 1.6. This means that two people living together and spending $160,000 can each achieve the same living standard as they would on their own, but spending $100,000 each. Second, if they divorce, they will downside their collective housing, going, eventually from $2 million to $1 million in total house value. This saving on housing costs permits a higher living standard. Third, when they divorce they need two homes, which entails two property cost bills, two mortgages, two insurance policies, and two sets of maintenance bills. This, too, makes divorce costly.

What To Do?

Frank and Kathy are mulling things over. Suffering a 25.1 percent living standard decline for the rest of their lives is no minor manner. Last we heard, they were checking out marriage counselors.