Marriage makes a kind of economic sense. Two homes turn into one; two grocery lists become a single shopping trip.
Divorce has the opposite effect. When a couple splits up, they divide their resources. Now half of the money has to fund a home, a car and all the other necessities of life.
It’s not easy to live on half your accustomed income and assets. That’s particularly true when the markets are down and inflation is high. The S&P 500 index began the year at nearly 4,800, a record high. By mid-July, it had dropped to barely over 3,800, losing nearly 20 percent of its value in just seven months.
For divorcing couples, that 20 percent — and the overall economic situation — makes a split more difficult, said Kelly Burris, a senior litigation partner at Cordell & Cordell in Austin, Texas.
“Divorce during a recession can be hard,” she said. “If you’re the monied party and you can afford a divorce, this is a good time to get a divorce. If you aren’t, this isn’t a great time to do it.”
Still, Burris said that she has clients who are putting off splitting up until their personal finances recover.
Asset values and income are down, housing prices are up
The problem involves the complexities of asset value, income and housing prices. A couple whose assets exactly track the S&P 500 would have lost $40,000 on a $200,000 investment portfolio. Each spouse would have $20,000 less to begin a new life. There’s less in the kitty to divide.
At the same time, pandemic-related unemployment dealt a blow to many families’ incomes. Between 2019 and 2020, about 9.6 million U.S. workers aged 16 to 64 lost their jobs, according to the Pew Research Center. Some are still unemployed; others have taken lower-paying jobs. All of them have missed out on the raises and bonuses they might have enjoyed if they had stayed employed. That means less money in bank accounts and lower awards of alimony and child support, which are often based on income.
Meanwhile, housing prices have shot skyward. The median price of a U.S. home was $313,000 in the first quarter of 2019,
Cash and home vs. investment portfolios
In Burris’ experience, the spouse who earns less — often the wife — is typically more interested in security over speculation and so prefers to receive cash and real estate in a divorce settlement. That’s often an expensive preference.
“The person who isn’t getting the house gets more in investments,” Burris said. “They have less value in a recession but more ability to bounce back when the economy eventually recovers.” Agreeing to receive fewer investments but more cash gives a divorcing spouse fewer possibilities for future growth.
A marital home can also be disproportionately expensive for a single person. That’s in part because people often think of buying out a former partner’s equity as the cost of keeping a house. They forget to include the cost of property taxes, utilities, insurance, landscaping, repairs and upkeep, all of which can put a home outside someone’s budget.
That’s all assuming that the person who wants the house can afford to buy out the soon-to-be ex in the first place. Because the housing market is so expensive right now, the spouse who gets cash will spend a lot to buy out the former partner’s equity. If the newly solo homeowner needs a mortgage, she may find that her housing bill is even higher than she’d initially estimated, because interest rates have gone up substantially since the beginning of the year.
Joseph Goldy, a planner in Wayne, New Jersey, has a client who is going through a divorce and wants to keep her marital home.
“The problem is that the current mortgage is around 2.6 percent, fixed for 15 years. If she refinances right now, her payments will double,” he said. “Some lenders would release her ex and let her keep the mortgage, but many don’t offer that option.”
The client could find it difficult to even qualify for a mortgage.
Another of Goldy’s clients solved the problem of insufficient W-2 income with an asset-depletion mortgage. The lender doesn’t require that she use financial assets to make monthly payments but considers them in qualifying a borrower for a mortgage.
“She got a great rate compared with other offers,” Goldy said, noting that the technique saved his client about a percentage point versus a more traditional mortgage.
Higher interest rates can affect other kinds of debt as well for couples who are splitting up. Another of Goldy’s divorcing clients shares a large joint taxable investment account.
“There’s a margin loan, so they’re borrowing against the account. They had a fixed rate that’s about to expire and will reset higher. The margin rate going up and the portfolio value going down,” Goldy said.
Fortunately, this couple can split the loan, and Goldy’s client plans to retire her part of the debt.
How planners can help
Mary Ballin, a certified divorce financial analyst in San Francisco, remembers a client whose divorce settlement left her with just 18 months of funding.
“She said, ‘I’m not going back to work — I’m marrying another rich man,’” Ballin said.
The client ended up doing just that, finding and marrying a new husband within that year and a half.
That’s not something most people want or can readily achieve. Instead, Ballin suggested that planners help clients look realistically and strategically at their likely post-divorce financial lives. How much is there to split? Can the job you already have maintain you and the house you want to keep?
“Most of the time you won’t get spousal support beyond your former spouse’s retirement, and you won’t get child support after the kids are grown,” he said. “College might be a 50-50 commitment. Given all that, you need to discuss projected costs and how you’ll handle them.”
Along the way, planners can also help clients decide what assets will help them most.
“Attorneys are good at thinking about what clients want, rather than what they should want,” Ballin said.
A planner can offer perspective around what asset mix will be most helpful in the long run.
“You might want cash and the house, but don’t forget about the appreciating assets,” she said. “Take some risk and some stability.”
