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Re: Valuing pension for a divorce
Old 05-04-2007, 10:46 AM   #21
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Re: Valuing pension for a divorce

Quote:
Originally Posted by brownds
if i were eligible to retire today, i would get about 1500 a month. A quarter of that is $375.

What would I multiply that 375 by? The number of months we were married or try to figure out how many years i would live until?

that is what is confusing me.
brownds, here's an explanation for you. I don't know your background so if I say stuff you already know I apologize.

In finance, there's this thing called net present value, which is how much a certain set of payments is worth today. For example, if John owes Jane $100 that he is supposed to pay her a year from now, she would probably take $90 today, because she'd get the money sooner and could invest that money and maybe earn $5 on it over the next year that she was going to have to wait to get her money. Plus maybe she subtracts (or discounts) the payment another $5 because by getting her money now she's eliminated the risk that John would somehow weasel out of paying her, or that she'd have to hire a collector to go after John to get the money. So you could say that the $90 is the net present value (NPV is the abbreviation they use) of that $100 payment.

You can extend the idea to a series of payments. So if John owes Jane $100 a year for the next five years, Jane could figure out the NPV for each of those payments individually, then just add up the NPV's to get the NPV for the whole set of payments. Of course, she'd probably discount the payment five years out more than the one next year, because there is a longer time for her to earn interest, and a greater chance that John will die, forget to pay, or move to Mexico or whatever. So maybe she takes $90 for the first payment, $80 for the second, and so forth, and decides on an NPV of $90+$80+$70+$60+$50.

The same thing can be done with your pension. If you quit today, your company would be paying you $1500 a month starting at some point in the future. Let's say you're 50 now and your pension would start when you're 65, and you're expected to live to 90 based on some life expectancy table. So now we just take that series of payments of $1500 per month for 25 years starting 15 years from now, and discount it just like Jane did above, and calculate an NPV.

Another way of conceptualizing it is this. Would you sell me your pension for a $1? I give you a dollar and you just have your company send me your pension checks for the rest of your life. Probably you'd say no. But if I offered you a billion dollars for your pension, you'd probably say yes. Somewhere between $1 and a billion dollars, is a "fair" amount of money that I could offer you where you would be ambivalent because they'd be "equal" in value to you. That fair amount of money is the NPV. Of course, this value would depend on how likely you thought it would be that you'd actually get your pension, and how long you thought you will live, and what you thought inflation will be, and some other things, but there are standard assumptions that people can use to calculate the value.

If you were in my state and your divorce went like mine, you would just take that NPV and either (a) instruct your pension holder to give half the value to your soon to be ex -- I think you need what's called a QDRO for that, or (b) list the NPV on your half of the balance sheet and compensate by having him take some other asset. For example, if the NPV of your pension were $20,000, maybe you get the pension and he gets the used Cadillac that's worth $20,000.

Who has told you that he is entitled to 1/4th and do you understand why it is 1/4th?

Yor pension folks can probably tell you what the lump sum value of your pension is. That's the NPV I've been talking about. If they can calculate multiple lump sum values, take the one that makes the most sense to you. If you're unsure, and you're going to keep the pension through the divorce, choose the smallest lump sum.

Hope that helps.

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Re: Valuing pension for a divorce
Old 05-04-2007, 10:57 AM   #22
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Re: Valuing pension for a divorce

Most jurisdictions have an actuary who will do the calculations specifically for that purpose. That is the route I would go.
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Re: Valuing pension for a divorce
Old 05-04-2007, 11:17 AM   #23
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Re: Valuing pension for a divorce

Quote:
Originally Posted by SecondCor521
I think normally they calculate a lump sum value at the time of the divorce, so any increase in pension value due to years of service that occur after the divorce would only accrue to the pension holder and not the ex-spouse.

The spouse only gets 1/2 of that lump sum value (either from the pension itself or from other offsetting assets) at the time of the divorce, not 1/2 of the future pension benefits.
It is only half if the couple were married whenthe wage-earner got the job. In my case, I was working for 22 months before marriage so she only got 46% of the pension. At the time of settlement, I was drawing the pension, so the monthly payment was divided. We also have a 100% joint survivorship deal that survived the separation because it was struck for all time when I retired. So we are both planning to live a very long time to make sure the settlement remains fair.
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Re: Valuing pension for a divorce
Old 05-04-2007, 11:23 AM   #24
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Re: Valuing pension for a divorce

Quote:
Originally Posted by kcowan
It is only half if the couple were married whenthe wage-earner got the job. In my case, I was working for 22 months before marriage so she only got 46% of the pension. At the time of settlement, I was drawing the pension, so the monthly payment was divided. We also have a 100% joint survivorship deal that survived the separation because it was struck for all time when I retired. So we are both planning to live a very long time to make sure the settlement remains fair.
Yeah, everything I write about divorce stuff is to a certain degree YMMV. It's based on my experience and my reading up on my state's divorce laws.

In my state, my understanding is that property brought into the marriage or received as a gift or inheritance is considered separate property not subject to division. But anything during the marriage is subject to division. Then you get into the question of what about stuff that happened before and during the marriage, like your pension. In my state, if you commingle separate property and community property, then it all becomes community property. There may be an exception if you can clearly trace the assets.

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Re: Valuing pension for a divorce
Old 05-07-2007, 11:55 AM   #25
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Re: Valuing pension for a divorce

figured 1/4 because i worked 32 years and we were married 16 of those 32 years. 16 = half and i figure he gets half of that half. (because i em entitled to the other half) - that makes it 1/4.


does that sound fair?
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Re: Valuing pension for a divorce
Old 05-07-2007, 04:08 PM   #26
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Re: Valuing pension for a divorce

Quote:
Originally Posted by brownds
figured 1/4 because i worked 32 years and we were married 16 of those 32 years. 16 = half and i figure he gets half of that half. (because i em entitled to the other half) - that makes it 1/4.


does that sound fair?
Hey, fair is whatever you can get your STBX and a judge to agree to. In my case I married when I was young and relatively poor, so it didn't really matter much. Also, becuase I was distraught by the fact that my wife was leaving me and thought that being nice might win her back -- it doesn't as folks who have been through that already know -- I pretty willingly gave in on some similar items in our financial situation.

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