Dividing Pensions in NJ Divorce Mediation Part 2

In Tuesday’s post on dividing pensions in NJ divorce mediation, we discussed how pensions in pay status may be treated as either assets subject to equitable distribution or income that is factored into discussions on spousal support / alimony.  You can read that article by clicking here.  Today I am going to focus on treating pensions in NJ divorce mediation as income and give you some items to consider how they might factor into the spousal support / alimony issue.

Given the pension is in pay status, we already know what your monthly benefit is going to be so unlike pensions that are treated as marital assets subject to equitable distribution, their present value is a moot point.   Instead we need to prepare a comprehensive budget for each of you given that you’re now retired.  I’m going to assume if you have any income coming in is small at best and you probably aren’t socking away a ton of money in a 401(k) or IRA.

In this budget, you’ll estimate expenses in three main areas for your current marital lifestyle and your future individual lifestyle:

1. Housing costs – mortgages, taxes, utilities, repairs, etc.
2. Transportation costs -  car payments or leases, repairs, gasoline, insurance, registration, etc.
3. Personal costs – groceries, clothing, entertainment, vacations and the item I most often see undervalued – health care costs.

Once you’ve determined your monthly expenses, take a look at your monthly income from all sources:

1. Social Security
2. Your pension
3. Drawdown of other investments / savings accounts you may posses or will receive as part of your equitable distribution.

Now it becomes a simple matter of does income exceed or fall short of expenses?  Many people are surprised to find out that it is more expensive to run two households than one so while the budget exercise may seem unnecessary, I require all of my clients to prepare one so they may see for themselves how expensive it is to live on your own.

The last step is to compare your post-marital lifestyle to that of your soon to be ex-spouses’ lifestyle.  Are they comparable?  Do you have roughly equivalent expenses and income streams or is one of you is going to fall short each month or draw down your retirement savings at an accelerated rate thus leaving you with a potential shortfall at the end of your life? Remember – the marital lifestyle is the yardstick by which spousal support / alimony arrangements are judged so as angry as you might be about your divorce, spousal support / alimony is not meant to use as a weapon but rather a way of making each parties’ post-marital lifestyle a bit more equal.

Certainly the subject of dividing pensions in NJ divorce mediation is a complex one and it would be impossible to cover all the necessary issues in two blog posts but hopefully I gave you a bit of insight about what your options might be.  Should you have any questions about NJ divorce mediation, please feel free to give me, Joseph Dillon, a call at (908) 864-2177 and I’d be happy meet with you and your spouse to discuss how NJ divorce mediation can benefit you.

Dividing Pensions in Divorce Mediation Part 1

For divorcing couples who received a pension and are retired and collecting, when diving pensions in divorce mediation how are they handled, especially when they are in pay-out status?  Are they assets that are subject to equitable distribution or are they income streams that should serve as part of the spousal support / alimony discussions? Like most NJ divorce mediation issues, the answer isn’t clean cut and it’s best for the parties to decide.  For this article I am going to assume they are standard pensions and not public pensions as those have a high level of complexity requiring further explanation. 

I put this question to my colleagues and like most NJ divorce mediation issues the results came back split.  Some colleagues were convinced the law treats them as assets subject to equitable distribution and some believed they would be treated as income streams and should factor into spousal support / alimony.  So if you’re talking about diving pensions in divorce mediation, what should you do?  As a NJ divorce mediator I can’t tell you what to do so for today’s post, I am going to focus on the issues surrounding pensions as an asset subject to equitable distribution and in my next post, I’ll focus on them as an income stream and how they may factor into spousal support / alimony and let you decide.

When a pension is treated as an asset subject to equitable distribution, the first thing we need to do is get it valued.   Calculating present value for pensions is a complex exercise so it’s best to have a third-party evaluator do it for you.  Factors include, but are not limited to:

1. Years of eligible service
2. # of years you were married while in the pension plan (the coverture fraction)
3. Mortality tables
4. Your earnings
5. Service breaks

In theory the company was putting away a certain amount of money on your behalf for every year you were eligible so that when you retired and began collecting, the funds would be there for you.  That is the value we are looking to calculate.

Next we would compare the value of this asset along with your other marital assets and liabilities and see how your balance sheet works out.  Is the pension the only retirement asset you have while your spouse has a lot of 401(k) funds and IRA’s?  Do you both have pensions and if so, what is the present value of their pension?  And since you can’t exactly walk up to the window at your old company and say “Hi I’m getting a divorce, I need you to give my ex-spouse $300,000″ how will you get those assets to them?  Will they be through the exchange of other retirement or non-retirement assets?  Or can the other spouse collect a fraction of your monthly payment?  All good topics to discuss in NJ divorce mediation sessions.

When treating pensions as assets subject to equitable distribution, some clients feel it’s a “clean break” and don’t have to interact with their ex once the divorce is final. Other issues to consider include if your ex dies, can you still collect on their pension and what happens if they get remarried?  On the flip side, if the pension is the only retirement asset the two of you have, then there may not be another retirement asset to trade to offset the value and you may need to treat the pension as an income stream and receive some of that in the form of a monthly spousal support / alimony payment which we’ll discuss in my next article.

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Joseph Dillon is an Accredited Professional Divorce Mediator in NJ and Managing Partner of Equitable Mediation Services a firm dedicated to divorce mediation in New Jersey.  Please feel free to call us at (908) 864-2177 or send us a message.

What is the Cost of Divorce Mediation?

Recently I’ve noticed an uptick in the number of people who call me asking about the cost of divorce mediation.  And while it’s an excellent idea to get an estimate on what it might cost you, there is so much more to the cost of divorce mediation than price.  While most people might think of the cost of divorce mediation in terms of dollars and sense, hourly rates and how it compares to other processes such as litigation, collaborative divorce and cheap divorce (“Get a divorce for only $399!  Fast, cheap, easy!” – and a total lie, btw), what they don’t ask about are the hidden costs since how would know to ask?

First let’s answer your burning question but you have to promise me, you’ll read the rest of the article because there are some important facts listed below you won’t want to miss.

When it comes to the average costs of the four most common processes for a divorce, they are as follows:

1. Litigation – $78,000 to $180,000
2. Collaborative Divorce – $27,000 to $32,000
3. NJ Divorce Mediation – $3,000 to $5,000
4. Cheap Divorce – $399

OK, so when shopping on price, the cheap divorce seems like the real winner, doesn’t it? Let’s take a closer look.  Like the old saying goes you get what you pay for, with the cheap divorce kit, you get a book of forms.   Do you know how to calculate the NJ child support guidelines?  They are ridiculously complex.  I have an MBA in Finance and I still use a software program to calculate them!  Then there’s the tax issues surrounding Equitable Distribution.  Do you know what’s taxable and what’s  not?  Ever hear of a QDRO?  How about the cost-basis of your portfolio.  Know how to calculate that to determine the gain or loss on the assets?  There’s a hidden surprise for you when April 15th rolls around and you’re already divorced! Ever do a coverture fraction?  How about calculate the present value of a pension?  Why would you?  Suddenly the cost of divorce mediation is looking pretty good right about now.

For all of these reasons and more you need to seek a NJ divorce mediation service that can help you answer these critical questions and more as while the cost of divorce mediation is a little bit more than say the cheap divorce, at the end of the day, do you really know what you’re getting yourself into?  Divorce is a complex legal process with numerous twists and turns and no book of forms is going to answer your questions.  As far as litigation and collaborative divorce go, since you’ll get the same results using a NJ divorce mediation service as you will going those other routes, why spend the money?  NJ divorce mediation is the only way to ensure that you get a thorough process, excellent results and cover all of the issues that are important to you now and in the future.

What do you think the cost of going to court to untangle some mess you made back in the day with a cheap divorce?  The answer?  $25,000.  That cheap divorce isn’t looking so cheap now, is it…

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