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Military Retirement Payments Divorce Problem
Old 04-06-2009, 05:06 PM   #1
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Military Retirement Payments Divorce Problem

Was wondering if anyone would like to help me with this Military Retirement Payments problem I have:

Bob and Linda Smith are divorcing after 41 years of marriage. That date of divorce will be April 1, 2009.

Bob is retired military currently receiving $4,500 a month in traditional (or High-3) military retirement benefits. Bob was born April 1, 1949 and Linda was born April 1, 1951. They married on March 31, 1969, and Bob joined the army the next day. He retired 20 years later on March 31, 1989.

Bob, because he didn't want to pay for it, convinced Linda years ago to sign away her right to SPB, which is a type of military insurance that would assure that Linda continued to receive Bob's military retirement payments in the event that he died. If Linda chooses to participate in Bob's retirement benefits, and he dies, all benefits to her would cease. The only way to mitigate this is to purchase a life insurance policy on Bob that would pay her enough to ensure her financial future. Unfortunately, Bob is a smoker and Linda cannot afford the cost of such a policy.

Bob also doesn't really want Linda participating in his retirement (although there is some debate over whether he has a choice) so he is willing to "buy her out" of his policy.

Military benefits increase in January of each year by what is known as a COLA, or cost of living adjustment. This is a federally mandated increase that is tied to changes in the Consumer Price Index. The increase this year was a whopping 5.8%.

The question that needs to be answered: How much would he have to pay her today assuming all future COLA's will equal the average COLA of the last 10 years?

You should use March 30, 2009 as the date for your discount rate. Also assume that the effective tax rate will be 18%. Also assume that Bob and Linda are Caucasian.

Thanks in advance to anyone can help me with this at all. Above is ALL the information available to me to answer this question.
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Old 04-06-2009, 05:11 PM   #2
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Some people may like hypothetical questions being given to them to solve for free.

Maybe some of them will help you. The rest of us might prefer to know who you are, and why this is important to you.

Ha
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Old 04-06-2009, 05:12 PM   #3
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I'm not sure I have the answer for you, but if I were Linda, I would ask for 1/2 of his retirement pay. I would also ask for him to furnish an insurance policy to cover 1/2 of his pay should he die. Seems to me that she could make the case that she only signed away her survivor benefits because she thought she would inherit the bulk of his estate as his wife. Now that they are divorcing, she, most likely, will not inherit the estate, so he should pay for the insurance.
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Old 04-06-2009, 05:14 PM   #4
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It's basically just a future payments problem but I don't know where to start.
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Old 04-06-2009, 05:19 PM   #5
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This sounds like a problem on a test--is it?
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Old 04-06-2009, 05:24 PM   #6
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You may find this page to be interesting. I tried to find a historical record of actual retired military COLAs, but came up empty handed.
2009 COLA for Retired Pay - Military Benefits - Military.com
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Old 04-06-2009, 06:31 PM   #7
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Good grief, OP.

First, if the couple got married in '69 and are divorcing in 09, that makes 40 years, not 41.

Second, the phrase "date of divorce will be 4/1/09" is nonsensical. 4/1/09 is a date in the past, yet you're using the future tense.

Third, you suggest the problem should be solved using the average COLA over the past 10 years yet you don't provide that number. People here might be willing to help, but I'm not looking that up on the web for ya.

Finally, here's the real answer:

A. If Bob and Linda aren't actually divorced, then the buyout is whatever Bob and Linda can negotiate between the two of them, possibly with the help of a mediator or their attorneys.

B. If Bob and Linda are divorced, then the buyout is whatever is decreed in the court order, unless Bob wants to go to jail for contempt.

C. If this is a homework problem, ask your professor or TA for help.

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Old 04-06-2009, 07:51 PM   #8
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What is this, the homework hotline?!? And a cheery "how do you do" to you too!

Let me take a thrashing break to suggest that you go someplace where there's a larger population of military veterans. Some of them might even care to do your work for you. You could try DFAS (Military Pay) or, as Freebird has suggested, Military.com.

OK, back to the thrashers.

BTW, Freebird, I found this 14-year history over at MOAA.
http://www.moaa.org/lac/lac_issues/l...d/lac_cola.htm

Tom Philpott put this article up at Military.com last year:
http://www.military.com/features/0,1...ml?wh=benefits

If anyone else has a table of military retiree COLAs, especially as they compare to military pay raises, I'd love to see it!
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Old 04-06-2009, 08:57 PM   #9
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Average COLA is 3.02 from that link provided. I still can't figure out how to put all that together. I was informed to not compound each year, and just start with year 1 and get each years present value up to the life expectancy, then sum them. But whose life expectancy? If it was the mans it would be 20.9 years, and if it was the womans it would be 24.1 years.

Thank you for your responses so far. And does anyone know how to do these present values? I was also told to use a Treasury Yield Curve Rate, and the one I need to use is the 20 year which is 3.82
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Old 04-06-2009, 09:22 PM   #10
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Sounds to me that she signed away her rights to any money. She signed the paper now she has to accept the consequences.

I'm not doing the math for you.
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Old 04-06-2009, 10:53 PM   #11
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Anyone know how to do this year 1 PV?
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Old 04-07-2009, 05:03 AM   #12
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He should plan on "giving up" 44% (which I believe it the correct percentage) of his "retirement pay" to Linda for starters. Don't know about the "buy out" stuff or even if it will work for military retired pay. I guess the simplistic way is to purchase an annuity that would payout to "Linda" $1,980 a month (increased from 2009 at the CPI rate) for her life (after "Bob's" death, assuming he predeceases her).
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Old 04-07-2009, 06:34 AM   #13
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Former boss was a retired 2-star. Half of his retirement pay goes to his ex-, and aout 70% of their assets (substantial) went to her. I don't feel like doing PV calculatons this late in the evening....sorry. (is it homework?).

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Old 04-07-2009, 07:34 AM   #14
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use the pv function in excel.
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Old 04-07-2009, 07:42 AM   #15
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Here's my answer. Please let me know where I missed points so I can review for the final.

Edit: Sorry, can't make it too easy for you. Also, there was a typo in one of my formulas, so the total was wrong.

However, the simple formula for present value is available here: http://en.wikipedia.org/wiki/Present_value

And the treasury yield curve is here:
http://www.ustreas.gov/offices/domes...te/yield.shtml
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Old 04-07-2009, 09:36 AM   #16
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Soup, can you show me your functions? I really appreciate your help.
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Old 04-07-2009, 12:39 PM   #17
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From experience:

The state in which you are divorced has their own ideas as to how retirement assets will be divided...DFAS has a booklet on how they will calculate that. Rule of thumb - after 10 years of marriage, spouse usually gets 50% of retired pay that would have been attained had one theoretically retired at that rank...and that would include COLA. As for SSB, that's merely a survivor benefit - i.e. if pensioner dies, then a percentage of the pension is provided for the insurance beneficiary. What the wife has 'signed away' is the pension benefit if the pensioner dies. He/she didn't sign away her rights as a divorcee who by the law can be entitled to part of her ex-husband's/ex-wife's assets if they get divorced.

In your theoretical case, he/she could be entitled to 50% of his retired pay at the rank he/she attained when he retired....in other words a full 50%.

By the way - did you notice the he/she - yes, the sword cuts both ways on this one.....
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Old 04-07-2009, 01:46 PM   #18
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Quote:
Originally Posted by deserat View Post
From experience:

The state in which you are divorced has their own ideas as to how retirement assets will be divided...DFAS has a booklet on how they will calculate that. Rule of thumb - after 10 years of marriage, spouse usually gets 50% of retired pay that would have been attained had one theoretically retired at that rank...and that would include COLA. As for SSB, that's merely a survivor benefit - i.e. if pensioner dies, then a percentage of the pension is provided for the insurance beneficiary. What the wife has 'signed away' is the pension benefit if the pensioner dies. He/she didn't sign away her rights as a divorcee who by the law can be entitled to part of her ex-husband's/ex-wife's assets if they get divorced.

In your theoretical case, he/she could be entitled to 50% of his retired pay at the rank he/she attained when he retired....in other words a full 50%.

By the way - did you notice the he/she - yes, the sword cuts both ways on this one.....
This intersting, but I don't think I understand. Can I just ask if this is correct? Say SillyMan divorces wife, Major Gutierrez, after 10 years of marriage. She does very well, and finally retires 13 years later as an O-6 with 23 years in.

I assume that she must retire before her ex can get anything. Correct? Would he then get 1/2 of what someone who retires after 23 years as an O-4, or 1/2 of her actual O-6 retirement?

If he gets only half of O-4 retirement pay, would she then get O-6 minus (1/2 of O-4)?

This seems very convoluted, but it is the best I can do to frame the question.

Ha
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Old 04-07-2009, 03:13 PM   #19
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Quote:
Originally Posted by soccer866 View Post

Bob also doesn't really want Linda participating in his retirement (although there is some debate over whether he has a choice) so he is willing to "buy her out" of his policy.
I didn't read all the posts in this thread, so this might have been answered better than I can. According to Federal law, military pensions are considered "property". She is entitled to 50% of his retired pay whether he wants to pay it or not. If she agrees to a "buy out" that's another matter. Not knowing the situation, not sure why she'd want to accept that.
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Old 04-07-2009, 03:57 PM   #20
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Quote:
Originally Posted by haha View Post
This intersting, but I don't think I understand. Can I just ask if this is correct? Say SillyMan divorces wife, Major Gutierrez, after 10 years of marriage. She does very well, and finally retires 13 years later as an O-6 with 23 years in.

I assume that she must retire before her ex can get anything. Correct? Would he then get 1/2 of what someone who retires after 23 years as an O-4, or 1/2 of her actual O-6 retirement?

If he gets only half of O-4 retirement pay, would she then get O-6 minus (1/2 of O-4)?

This seems very convoluted, but it is the best I can do to frame the question.

Ha
It could be either - depends on how good the lawyer is....I've seen both. Yes, she must retire before ex can collect. A good lawyer would have him getting 50% of the 10 years worth of the O-4 pension. And to get what that would be one would need the excel and NPV-PV-FV calculations and it's too late for me to do that right now :-)
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