Valuing pension for a divorce

[brownds]

i am in the middle of a divorce and wondered if anyone can tell me how to figure out the value of my pension. My soon to be ex-husband is entitled to 1/4 of it but i'm at a loss on how to figure out what that would be.

 

[brewer12345]

There are specialized services that do this (for a fee). Poke around on the web and I am sure you will find them.

 

[SteveR]

I would think your benefits department could give you that information since they will have to calculated it for the QDRO for the court. (Qualified Domestic Relations Order). Been there done that and have the scars to prove it.

Your 401k is also on the table as are stock options and any other financial "benefits" which have a defined value in current dollars.

 

[SecondCor521]

In my divorce and in my state, if you and your STBX and the associated attorneys could agree on a split of the finances, then the court would pretty much go along with it.

So one approach would be to contact the pension folks and ask them what the lump sum value is today, then see if your STBX would accept transferring 1/4 of that lump sum amount to him.

2Cor521

 

[aenlighten]

The calculations aren't that difficult; it's the assumptions involved. It would be a quarter of the net present value of a future life annuity discounted to the present day. The discount rate used and age to retirement are important. The amount which you would currently be credited with rather than the amount you would eventually be entitled to. The start date and life expectancy would set the duration.

 

[SecondCor521]

Another thing that would affect it would be the pension choice she makes. I had a pension once that gave me a choice of a single life annuity or a couple of joint life annuities with the payout equal to 100% or 50% of the initial amount once the first person died. I dunno if the OP has such a choice, but I know that when I was valuing my pension this decision made a difference in the NPV.

2Cor521

 

[Caroline]

I used to work for pension actuaries, and they were hired by divorce lawyers to work out the value of the pensions. This was back when the earth was cooling and I was still young, so I'll report just what I remember...

They just used the formula that the pension itself used -- years of services x last three year's salary, or whatever. They usually ran a variety of calculations using various assumptions, as SecondCor521 points out -- full joint and survivor, half joint and survivor, etc. along with various assumptions as to how long you'd work -- 55, 60, 65, etc.

Then the lawyers argued about what number to use, and how it weighed against other factors (the house, the car, yada yada.)

One note -- I have a friend at work here who divorced recently. She traded away the house to her husband so that she could keep full rights to her pension once she retired. What did our Megacorp employer do this year? Tell us that at the end of 2007 they'd stop making contributions to the pension. She's not happy. So whatever the actuaries decide, it seems that you'll want to make your own calculation as to how likely the pension is to grow as you expect it to.

Good luck!

 

[CyclingInvestor]

My divorce was a little more congenial - no lawyers involved.
I assigned values to everything, she chose half based on
the assigned values. It semed fair to both of us.

 

[sgeeeee]

I would think you could get a pretty good estimate by pricing an equivalent annuity. You can find several at:
http://www.golio.net/My_Homepage_Files/Page13.html

under Section 5.4.

 

[teejayevans]

My divorce was a little more congenial - no lawyers involved.
I assigned values to everything, she chose half based on
the assigned values. It semed fair to both of us.

Ditto, you'll save THOUSANDS of dollars in lawyer fees. Lawyers, being slimy scum
sucking maggots will try to convince each of you it's in your best interest to fight
to the death. Tried to avoid the lawyers, otherwise you can easily blow 50K before
you know it.
Assuming no kids, just sit down, add it all up, divide by 2, try to not dip into the
retirement accounts (sell stocks!!! especially now!, sell house or take a 2nd mortgage),
but leave the 401k/IRAs alone if you can. Also, whatever you brought into the marriage
should be off the table.
good luck,
TJ

 

[donheff]

My divorce was a little more congenial - no lawyers involved.
I assigned values to everything, she chose half based on
the assigned values. It semed fair to both of us.

That is a great way to do it. It is kind of like the sharing deal with kids - kid one cuts the cake, kid two chooses the slice.

 

[travelover]

Please see my PM. Potential value of pensions can be huge and writing an accurate QDRO ensures that you make the agreement you intended to make.

I agree with comments to limit input from attorneys - they have an inherent conflict of interest. That said, a good attorney can save you from making a technical error that will cost you in the long run.

Good luck.

 

[Sandy]

See your human relations office: in my DH situation with his ex, it was a straightforward math problem: take retirement formula as if retired that day and prorate half based on years married.

I was able to figure this, took me 10 minutes, but the court required an attorney to do it - he charged $400+ and we were within $1-$2 of each other.

I suppose if DH had had other assets he could have bought her out, but that was not the case. So, she will get a portion of his retirement when he retires.

 

[windsurf]

Teejayevans said: "Ditto, you'll save THOUSANDS of dollars in lawyer fees. Lawyers, being slimy scum
sucking maggots will try to convince each of you it's in your best interest to fight
to the death. Tried to avoid the lawyers, otherwise you can easily blow 50K before
you know it."


And what is your honorable profession, my man?

 

[dumpster56]

i am in the middle of a divorce and wondered if anyone can tell me how to figure out the value of my pension. My soon to be ex-husband is entitled to 1/4 of it but i'm at a loss on how to figure out what that would be.

Ouch

he wants that 1/4??

What a jerk!

Hey it didn't workout sorry but I would never want or take any of my wifes pension if I happened to break up.

Ya know what I mean.?

 

[SecondCor521]

Ouch

he wants that 1/4??

What a jerk!

Hey it didn't workout sorry but I would never want or take any of my wifes pension if I happened to break up.

Ya know what I mean.?

In my state, a 50/50 division of marital property is considered de facto (<-not quite the right legal term) fair. If any part of the pension was earned during the marriage, it would be considered marital property and thus subject to division.

Two things confuse me about the OP, though. Why only 1/4 and not 1/2? And what does she mean by "entitled"?

2Cor521

 

[nun]

How do the actuaries and laywers account for years of service in the pension as that's critical to
calculating the pension. Do they just say the spouse gets a certain fraction at retirement, I can see that as being an issue in acrimonious divorces where people just want to cut off all contact.

I was lucky in my divorce, we split all liquid assets 50/50, house proceeds, after tax stuff and flipped a coin to see who got first choice of houshold goods. I represented my self, she had a lawyer to file the paperwork, but we wrote our own separation agreement. She didn't want any of the pensions or 401ks, I told her to think long about that and to talk to her lawyer, she just didn't want the bother....I was 36 and she was 30 so maybe retirement seemed a ways off. Anyway 10 years later its almost enough for me to retire on now.

 

[SecondCor521]

How do the actuaries and laywers account for years of service in the pension as that's critical to
calculating the pension. Do they just say the spouse gets a certain fraction at retirement, I can see that as being an issue in acrimonious divorces where people just want to cut off all contact.

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.

Of course people can write up any separation agreement they want, so they could entangle themselves that way if they wanted. I personally wouldn't. I know someone getting divorced now who is heading towards owning rental vacation property along with the ex-spouse-to-be, and is adding in all sorts of clauses about what happens if one wants to sell, or if one dies, and who gets to vacation there when, and so forth. I think it's going to be a nightmare personally.

2Cor521

 

[nun]

Of course people can write up any separation agreement they want, so they could entangle themselves that way if they wanted. I personally wouldn't. I know someone getting divorced now who is heading towards owning rental vacation property along with the ex-spouse-to-be, and is adding in all sorts of clauses about what happens if one wants to sell, or if one dies, and who gets to vacation there when, and so forth. I think it's going to be a nightmare personally.

2Cor521

Agreed, I carn't imagine sharing a vacation home after a divorce, but as the Ben Stein thread implies the vacation home is now a necessity so maybe some folks just carn't give it up .

Now you mention it, its obvious that the pension would be valued at the time of the divorce and I assume its value
is accounted for in one spouse getting a greater portion of things like 401ks and house proceeds.

 

[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.

 

[SecondCor521]

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.

2Cor521

 

[Brat]

Most jurisdictions have an actuary who will do the calculations specifically for that purpose. That is the route I would go.

 

[kcowan]

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.

 

[SecondCor521]

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.

2Cor521

 

[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?