QUESTION: I am 46 years old and a successful high school teacher. My wife makes more money at her job as an executive. After about nine months of battling, my wife and I have chosen to divorce after 14 years of marriage. We haven’t actually filed the paperwork, but we are in the process of doing it. Currently we are in a custody battle over our three children, ages 7, 14, and 16. I look forward to moving ahead with my life. I am planning on taking $10,000 from my IRA and using this money to pay for the divorce. How much will this impact my future, and what are the overall costs of a divorce? Am I doing the right thing? — Gus in south Monterey County
ANSWER: I am not a psychological professional so I can’t advise you on your divorce. I am not a lawyer so I cannot advise you on your legal affairs. But I can share with you the general experiences I have had as an investment adviser concerning clients and divorce.
Here’s what most investment advisers don’t want to tell you: the greatest destroyers of wealth are not usually bad selections of mutual funds or lack of timing the market, or even bad asset allocation. Investment advisers like to pretend that all these investing skills are more crucial to you so that you will value our services more.
However, my experience has been that the greatest destroyers of my clients’ wealth are in fact my clients’ personal lifestyle choices. Behaviors such as addictions, dysfunctional relationships, unresolved past hurts and divorce wreak more havoc on our financial well-being than most investment decisions. The choices we make today affect the rest of our lives.
Since this is the case, it makes sense to analyze current decisions such as divorce from a long-term perspective, regardless of how uncomfortable we might be currently. Maturity is allegedly the ability to defer immediate gratification. Wisdom is the ability to analyze today’s decision in terms of what it will do to you not only today, but also 10, 20, 30 years or beyond.
If you take out $10,000 from your IRA, you will assess a 10 percent penalty, and you will pay taxes on your withdrawal. So you will sacrifice more than $10,000. I don’t know your individual tax situation, but these penalties and taxes will be severe. Let’s guess that you will have to take out about $18,200 to get a net withdrawal of $10,000. That’s an 82 percent cost of capital, which is toxic enough to send any investment professional screaming from the room.
Now let’s take a look what else you are giving up to pay for your divorce.
At a conservative 8 percent growth rate, in 10 years your $18,200 would be worth about $39,000. In 20 years, you will be 66 years old. At 8 percent your money should then be worth about $84,000. And in 30 years you will be 77, and your $18,200 will be worth about $183,000. Of course, inflation and the cost of taxes when you withdraw the money will have an impact. Nevertheless, these future values are what you are giving up when you take $10,000 out to pay for your divorce. Small costs now are big costs later.
I am by no means capable of recommending one course or the other as regards your divorce. I am utterly unable to tell you if you are doing the “right thing” or not. By all means, divorce in your case may be necessary to create a functional, fulfilling life for your children and for you. But I wouldn’t be doing my job if I didn’t share my professional experience.
Hypothetically, let’s say that as your investment adviser I tell you to liquidate everything and put the results into cash. Now take half the cash, which represents the bulk of what your spouse and you own, take it out into the back yard, make a big pile … and burn it. When I watch clients divorce, it often feels like this. I often see a financial conflagration prepared and stoked by both parties.
Usually, the expenses of divorce and the expenses of maintaining two homes afterward are grossly underestimated.
People also tend to underestimate the costs of court-ordered child support.
I have also noted that my clients often experience a period of extreme emotional hardship after a divorce in which earnings decline and overall financial stewardship deteriorates. My experience has been that after a divorce, many people have a hard time getting their financial lives back on track beyond the simple financial costs of a divorce.
It’s also worth considering what else $10,000 could buy. Instead of a divorce you could do an entire summer in Maui. Instead of divorce you could engage in some world-class therapy. Or you may just wish to take a step back and retain the wealth you have sweated so much to accumulate.
Divorce is usually more expensive than most of us realize. A decision of this magnitude deserves deep consideration and contemplation from different perspectives and time horizons. If you are able to step away from your feelings of the moment and consider all the different choices and possible results, your probability of making the right choice will increase tremendously.
Written by a financial adviser in the The Californian.
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