Use economic research to call a truce in divorce wars

Thanks to their rich parents, my friends “Joe” and “Sue’s” wedding was a three-day, 200-guest extravaganza on Maryland’s Chesapeake shore. Day 1 featured a fantastic clambake. Day 2’s barbecue was to die for. Day 3’s nuptials were black-tie, with tears, cheers, mouth-watering canapes, filet mignon, Dom Perignon — you get the picture.

If any marriage was going to last, this was it. No one could spend this much money on a wedding and see it go poof. Yet seven years later, the joyous couple was at war — divorce war.

No big surprise. These days everyone seems to be getting divorced. This year, 1.6 million Americans will untie the knot. Thankfully, the divorce rate is falling among those recently married. University of Michigan economist Justin Wolfers predicts that only one in three such marriages will implode.

But back to the war. Joe agreed that Sue would have custody of their 3-year-old child, “Karen.” But on alimony and child support, the swords were drawn. Sue teaches at a private school. Joe is a well-paid lawyer. Rather than get a master’s degree to raise her future income, Sue supported them both while Joe studied law. Sue’s classes are small and she gets her summers off. But doing her job and caring for a 3-year-old is no picnic. For his part, Joe works nights and weekends and must keep doing so to make partner.

Maryland has no set alimony formula, not even guidelines. But state law permits permanent alimony if the two spouses will experience major living standard differences.

Now for the pretend part of this story. Rather than rush off and hire $600-an-hour lawyers, Joe and Sue sit down to discuss things calmly. Five minutes later they are screaming at each other.

Joe: “Sue, given I earn more and work harder, I should have a 30 percent higher living standard, by which I mean spending ability. I’ll pay Karen’s costs and give you 20 percent of my salary in alimony until I retire. But that’s it. Not a penny more!”

Sue: “That’s unbelievably unfair. You’ll soon be making 20 times my salary, receive far larger Social Security benefits, have a much better health plan and receive a fat pension.”

Joe: “I have to pay high taxes on every penny I earn. Eighty-five percent of my Social Security benefits will be subject to taxes. And I’m going to be hit by Medicare Part B’s high-income premium.”

Sue: “Alimony is taxable. And your pension will equal 75 percent of your final pay! All I’ve got is a crappy 403(b) plan.”

Joe: “Twenty percent of my salary is plenty to get you to 70 percent of my living standard.”

Sue: “Listen, I’m OK with this differential. You work hard and we’ve only been married seven years. But 20 percent of your salary is way too small. Once you’re 65, the alimony stops. I could live to 100. You’ll have that huge pension.”

Joe: “The pension is fixed. It doesn’t grow with inflation.”

Sue: “Be reasonable. Otherwise, I’m calling a lawyer.”

At this point, I intervene.

“Joe, Sue, stop fighting. You’ve made huge progress. You’ve agreed on a living standard differential. Now you just need software to figure the asset division, alimony and child support that produces that differential.”

Back to you, my reader. Divorce wars are psychologically and financially devastating. Hopefully you aren’t getting divorced. But you might know someone who is. Share this advice. The bottom line in every divorce settlement is what each spouse will get to spend, how hard and long each will work, and how their housing compares.

First, figure out what ongoing living standard differential is fair. Then propose a settlement that produces this differential. My company’s new tool can do this — at less cost than a half-hour of a divorce lawyer’s time. But other software tools or financial planners can do this as well.

(Note: Since I’ll occasionally mention or use my company’s tools in this column, I want to make clear that I derive no income from the company, nor do I promote anybody else’s products. My reward is psychic. It’s using the latest methods developed in economic research to help people make better financial decisions.)

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