Are You Leaving Money on the Table?
Think you’ve accurately valued your marital and non-marital assets? How about your soon to be ex-spouse?
You may want to take a second look…
When it comes to employer sponsored retirement plans, I’ve found that more often than not, divorcing couples value these incorrectly.
Let me explain.
The most common type of an employer sponsored retirement plan is a defined contribution plan (i.e. 401(k), 403(b), 457, TSP). These types of plans have cash value today, and can appear relatively straight forward to value. However; when these assets are owned prior to marriage, you’ll want to perform additional calculations. The pre-marriage value plus any gains or losses associated with this value would be considered non-marital. Many individuals do not take this extra step potentially leaving a large sum of money subject to division.
The second major type of retirement plan is a defined benefit plan - frequently referred to as a “pension”. These types of plans promise to pay the employee a certain amount per month at retirement. It has no cash value today. Once the marital percentage is determined (which requires yet another calculation), the two most common methods used to divide these benefits are:
- Present value method– First a calculation is done to determine the present value of the future income stream. The non-employee spouse is paid a lump-sum settlement from the pension or receives a marital asset of equal value to their interest in the pension. The non-employee spouse gives up any rights to future pension payments, with the employee spouse keeping 100% of the payments for him or her-self. Make sure taxes are taken into consideration!
- Deferred division method: Each spouse is awarded their respective share of the future benefits when and if they are paid.
Often, when the first method is used, the present value is not calculated correctly. That’s because the value of a pension is completely unrelated to the amount of money that has been withheld from paychecks or pooled in an account. Let me reiterate, the present value of a pension does NOT come from an account balance! Its value is determined by the company’s guarantee to pay based on a predetermined plan formula, involving many variables making it a complex calculation. A few variables include total number of years worked until retirement, future earnings, and interest rate.
I know all of this can seem overwhelming, but you don’t have to go it alone. As a Certified Divorce Financial Analyst®, I am here to help you navigate the myriad of financial details and keep more of what’s yours! Contact me today!
As always, if I can ever be of assistance to you or someone you know, please do not hesitate to call or email me directly at 803-576-4932, Amanda.Gunn@raymondjames.com
Sincerely,
AMANDA SIMCONIS GUNN, CDFA®, AAMS®
Financial Advisor
Opinions expressed are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice.
