It’s imperative to count all assets when calculating a divorce settlement. Anything overlooked today will be challenged tomorrow. Retirement funds can be difficult to account for accurately unless you use tools like the pension buyout calculator in Divorce Financials divorce legal software.
Defined Contribution Plans
Nowadays most employers offer defined contribution plans. The employee contributes a certain amount each month. The employer typically matches employee contributions up to a certain amount, such as 5% of income. What employers like about these plans is they are basically savings accounts. The employer doesn’t have any responsibility for administering them. The employee simply withdraws money upon reaching an appropriate age.
Divorce attorneys love defined contribution plans as well. These assets are easy to value and divide up. A typical strategy would be to look at the value of the account on the date of marriage, subtract that from the value at the date of divorce, and divide by two. That’s how much the spouse gets as part of the overall settlement agreement.
Defined Benefit Plans
Some employers still offer traditional pensions, known as defined benefit plans. Employees don’t contribute directly. Instead employees have to work a certain number of years to become vested and then receive a percentage of their income after retirement. The percentage is based on factors such as years worked and age of retirement. Retirees receive these payments until death.
Defined benefit plans are trickier to value, and not all divorce financial software has the tools to do so. One way to settle is simply to allot a percentage of the payments to the ex-spouse after retirement but this is often unsatisfactory to both parties. The retiree gets a severe financial burden on a reduced salary, and the ex-spouse must wait years or decades to get remuneration. An alternative is to use formulas to determine the present value of the pension based on expected date of retirement, life expectancy, and so on and then pay it out in a lump sum.
Does Retirement Affect Alimony?
Divorcing couples who are close to retirement might prefer to divide up retirement payments rather than divvying up a lump sum, but if that’s the case then attorneys need to consider the change in income in alimony calculations. If alimony will extend past the retirement dates, then it might be appropriate to reduce alimony payments at the time the payer retires since there will be a significant decrease in income. Of course the payee may not see it the same way, so negotiation will be necessary. This is why tools like Divorce Financials, which allows you to prepare multiple alimony payment scenarios, is so important to divorce settlements.
Whatever you do with retirement, do it earlier rather than later. Your client is not going to want to face a challenge to the settlement or alimony agreement years from now. Do all your calculations up front and let the couple move on with their lives.