Divorce: Financial Planning Case Study
They are getting a divorce. He offers her two options: Option one, he makes cash payments to her for some number of years, or Option two, a lump sum today but with a substantial discount. Which option should she choose?
Divorce can be the largest financial transaction of a person’s life. For some, this can also be the first time they have had to manage their own finances and investments.
We know that life events happen. Some things we can plan for like buying a home, funding a child’s education, or preparing for retirement. Divorce, on the other hand, can feel unexpected and be emotionally exhausting.
Our client was faced with making a big financial decision. How could she know which option was better?
Vector is fortunate to have Sharon Calhoun as managing director and senior wealth advisor. Sharon has served Vector clients since 2000 and recently earned the Certified Divorce Financial Analyst (CDFA) designation. CDFA® professionals understand how to help their divorced and pre-divorce clients with financial issues like valuing and dividing property, spousal support, and retirement assets.
The client met with Sharon to discuss the proposed options: payments over time or a discounted lump sum. Together, they used Sojourn, Vector’s proprietary wealth planning application, to analyze each scenario. How much could the client afford to invest from spousal support? What is a reasonable rate of return on investing some or all the funds? What was fair for both parties?
After totaling each option, Sharon and the client started to think outside the box. Yes, the monthly payments option was attractive—a steady income without a discount. What if, however, the proposed lump sum discount was less? Much less.
They increased the starting value of the hypothetical lump sum in Sojourn to see how the numbers would play out. They found that the higher lump sum amount, thoughtfully invested, could produce more income over time than non-discounted payments.
Feeling empowered, she countered his offer with her own. He accepted. Not only did she secure better terms in the divorce settlement, but she also discovered the confidence that comes from understanding how investments, now in her name, could provide an income stream for many years to come.
At Vector, we believe that our clients shouldn’t have to do financial planning and divorce alone. Contact us if you, a friend, or a family member is facing something similar in your life. We will discuss your questions and plan for the next steps.
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This material has been prepared for informational and educational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Vector advisors do not provide tax, legal or accounting advice. Past market performance is not a guarantee of future results.
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