Recently I was hired by a divorcing client, let’s call him Joe, who had been contributing to two retirement plans for approximately 20 years. He was married for only the last 9 of those years. Fortunately, Joe saw the wisdom in hiring a divorce financial analyst to calculate what portion of the gains and losses should be allocated to his pre-marital account balances so he could claim it as his separate property. The difference meant over a hundred thousand dollars to Joe, and far exceeded the cost of my performing the calculations.
Let’s take a simple example to show why a back of the envelope calculation could provide a completely inaccurate picture of the value of the marital vs separate portions of a 401(k) plan account.
Value of account as of date of marriage: $200,000
Contributions after date of marriage: $100,000
Amount of increase after date of marriage due to gains: $200,000
Value of account as of date of separation: $500,000
In Joe’s case, during an unsuccessful settlement meeting between his spouse and their attorneys, the attorneys decided to divide the $200,000 gained on Joe’s account by attributing 2/3 of the $200,000 in gains to Joe’s premarital account balance, since $200,000 of the $300,000 in the account not attributable to gains was his premarital account balance. This was a gross oversimplification and did not reflect reality. Why? Two main reasons:
- It did not reflect when the $100,000 in marital contributions was actually made. In Joe’s case, during the first years of marriage Joe cut way back on his contributions and therefore his pre-marital account balance earned much more than 2/3rds of the gains in the account.
- It did not reflect fluctuations on gains and losses over the period of the marriage. It could have been the case (but wasn’t) that shortly after Joe was married, the market had a steep downturn which decreased the value of his pre-marital portion. A larger portion of the gains earned post-marriage would have been attributable to post-marriage contributions.
To get an accurate picture of what portion of an account is attributable to the amount that was there before Joe got married, Joe needed to gather as many statements as he could, the more the better, beginning with a statement that was as close to his date of marriage as possible. While in this particular case, I acted as a financial analyst and not a mediator, it is not uncommon for me to mediate marriages where significant assets were accumulated prior to the marriage. Including a financial professional in mediation, particularly one familiar with divorce, allows for the accurate calculation of gains and losses attributable to the pre-marital assets and that’s what’s fair.