For most individuals, planning for retirement is saving for a distant dream, an elusive future. Divorce brings that faraway future into the very real present. The complexity of dealing with retirement assets can be further complicated if the savings is a pension plan. Unlike 401k or 403B Plans or an IRA, there is no real, in the sense of a touchable, fund with a set amount of moneys. A pension cannot be borrowed against. Moreover, you are not eligible for preretirement withdrawals even with a penalty. Pensions are a form of an annuity. Depending upon how long you have worked at one job and how old you are will determine when you reach eligibility age and how much you will receive as a monthly sum. The good news is that you can’t outlive your pension; the bad news is that you need to wait to collect, be it early eligibility or at full retirement age. To make things even more difficult, for divorce, pensions need to be valued. It is an actuary who will take into account the years you’ve worked, your salary, your projected lifespan, and your age of retirement, among other factors, to provide a present day valuation of your pension.
Retirement funds compiled during a marriage constitute marital funds. Suddenly, “It’s my pension.” becomes “It’s our pension.”, a fact not easy for many divorcing people with pensions or other retirement plans to accept easily. “I killed myself for this pension. How did you get into the picture? You did not help me build a business,” said one divorcing man who was married twenty-five years and had a civil service pension with significant value.
Whereas 401k Plans and 403B Plans and IRA(s) have a known value, in the divorce arena they are not exactly a “no brainer”. Here the most common argument is whether or not values need to be reduced to compensate for taxes to be paid upon cashing in. There are two primary schools of thought. One school of thought posits that the fact that taxes are deferred, allowing the money to grow tax-free, will yield, in the final analysis, a fund that is greater than any taxable investment account. The opposing school of thought argues that you need to value the fund after you have deducted for its future tax cut. As such, the very value of these plans is a subject of confusion and most certainly debate.
Given conflicting ideas and the emotional context in which people view retirement funds, it is not surprising that the question of how to divide this group of assets is frequently a source of friction. Consider the following couples’ solutions reached in mediation:
Daniel and Marion Peterson had a comfortable lifestyle. Their colonial home was situated in a safe community with good public schools. Their two children walked to the neighborhood school or were driven in one of the family’s two comfortable cars – life was comfortable but not really “O.K.” The decision to divorce was a mutual decision; both Daniel and Marion knew that divorce was inevitable even if they had different time frames for when the event should take place. The real clash came over the division of assets. Marion wanted to stay in the house with the kids until the youngest was in college. Daniel was all for a delayed sale of the house, for, say, a few years, but certainly not for fifteen years. “How”, he asked, “was he suppose to buy a house if all his money was tied up in the house?” Then, too, there was his 401k Plan and rollover IRA(s) from three prior jobs. The final settlement for this couple was for Marion to keep the house and for Daniel to keep his retirement funds. In this instance, the numbers were quite similar. Daniel did not propose that any reduction be taken for taxes. Marion was pleased that she did not have to be Daniel’s partner in owning the house; she could sell or not sell if and when she pleased.
Al and Janet Ballor had a different problem. Janet had a teacher’s pension, based on thirty years of teaching high school math. Al was an internist, practicing with two other doctors in a well-to-do suburban community. Although the couple had other assets, including a house, investment funds, and three automobiles, the hottest debate centered on Janet’s pension and Al’s practice. The pension and the practice were valued but Janet found it very hard to accept the valuations. How could Al’s practice be worth less than her pension? “Preposterous”, she announced. “My teaching job’s meager retirement is worth more than your fancy practice? No way.” Preposterous as it seemed to Janet, her pension did have significant value, even when Al was credited with a valuation for social security, a benefit that Janet relinquished as part of her pension plan. And so, they agreed, Al would keep his practice and Janet her pension. This agreement was quite separate from support payments based on Al’s and Janet’s income – here the discrepancy was real and not to be balanced away.
These two couples found ways to trade one asset for another. May times, this is not a possible solution since the couple does not have enough assets to trade. Other times they do not want to trade; they each want a piece. Thus, each one wants cash from the sale of the house and each one wants to have his and her own retirement funds. The solution hinges on timing; when to sell, how to divide, and so on.
Mediation offers a problem-solving opportunity to weigh alternatives and search for a fit that leaves each party feeling whole, if not necessarily happy. Afterall, no one really prefers to share. However, being fair to each other and to one’s self has its own form of “feeling good”, not to mention the very real benefit of not wasting assets on legal battles.