Background
During the divorce process of Fred and Vivian Andersen, Ron Anfuso advised Vivian’s attorney it would be in her best interest to receive counseling from Evan Miller, a Certified Financial Planner® (CFP), who is also a Certified Divorce Financial Analyst® (CDFA®). Evan and his associate Kathy Costas, CDFA®, specialize in helping coordinate the financial affairs of people who are going through or have completed a divorce. They help these individuals gain control of their financial lives by guiding them through a sophisticated wealth-management consultative process.
Vivian’s attorney agreed to chat with Evan Miller. As a result of their discussion, Vivian’s attorney recommended she receive counseling from Evan. For more than 20 years, Vivian has worked as a computer analyst within the financial services industry. At the time of the divorce, her annual salary was $150,000. Fred and Vivian have two children, a 16-year-old son and a daughter who is nine. They have owned a home for nearly 20 years in the West Los Angeles area valued at $1.5 million. Her son is a junior in high school with plans to attend college in the greater Los Angeles area.
Fred had little interest in keeping the house. Vivian, however, was emotionally attached to the family home and believed it was in the best interest of their children to assume full ownership. She thought her best option would be to keep the home at least until her daughter would be ready for college. However, she was uncertain whether this would be financially feasible and was troubled about making the decision to pursue gaining full possession. This is why Vivian’s attorney and Ron agreed that receiving counseling from Evan would be helpful. Initially, Vivian was hesitant. However, when Ron and her attorney described the benefits, she reluctantly agreed.
The Process
Evan began by gathering and analyzing Vivian’s financial information. He and Kathy use a financial projection software program, which includes a financial planning component they customized for divorce cases. This software enabled them to provide Vivian a comprehensive wealth- management perspective that allowed her to visualize alternative scenarios side-by-side. Although Evan and Kathy could provide multiple scenarios, based on their evaluation of Vivian’s financial situation and Evan’s discussions with Vivian, Evan and Kathy decided it was best to simplify the process by presenting two scenarios; Base Facts, which was grounded on Vivian keeping the family residence, and Downsize Home, which would entail Vivian and Fred selling the home and Vivian purchasing a smaller property.
The report Evan and Kathy prepared provided a summary of the two potential strategies.
General Background and Assumptions
| Vivian’s age: | 52 |
| Vivian’s annual income: | $150,000 |
| Age Vivian plans to retire: | 65 |
| Original home loan: | $450,000 |
| Mortgage balance (7/1/2016): | $350,000 |
| Monthly mortgage payments: | $1,900 |
| Projected educational expense for their children: | $70,000 |
| Vivian’s projected life expectancy: | 90 |
Vivian’s net worth during the divorce process was calculated as follows:
| Assets | |
|---|---|
| Cash equivalent: | $100,000 |
| Taxable investments: | $1,350,000 |
| Qualified retirement: | $1,000,000 |
| Life insurance: | $50,000 |
| Real estate: | $1,500,000 |
| Liabilities | |
|---|---|
| Mortgage: | $350,000 |
| Other income (proposed) | |
|---|---|
| Child support (annual): | $25,000 |
| Spousal support (annual): | $20,000 |
Base Facts Scenario
Vivian’s current living expenses are $144,000. Her post-retirement annual expenses were projected to be $140,000. If she kept the house, the most she would be in a position to afford spending annually before retirement would be $114,000.
Her assets at retirement were projected at $3,950,953. However, her resources were anticipated to be depleted by age 84. When turning 90, her assets would be estimated to fall to a negative $2,677,510. Adding to this dilemma, if she sold the home several years from now, she would lose her exemption of $250,000 on capital gains. Passing on this exemption would translate to a loss of $50,000 to $75,000.
Downsize Home Scenario
Under this scenario, Vivian would sell the current home and, thus, be eligible for the capital gains exemption. She would purchase a new home for about $800,000 with a mortgage of $400,000. Should she desire, she could safely increase her annual living expenses to $171,000. At retirement, her resources would be $4,823,794 and, at age 90, would still possess $38,149 in assets. Of course, if she maintained her expenses at $144,000, her assets would be considerably more.
Vivian’s Decision
Based on the numbers and her consultations with Evan and Ron, Vivian confidently decided it would be better to sell the family home and downsize. This enabled her attorney to present a proposed settlement to Fred that he and his attorney willingly agreed to. The result was an amicable divorce.
Vivian was thrilled with the outcome, as well as with Evan’s help and the assistance she received from Ron and, especially, her attorney. Furthermore, she enthusiastically expressed a desire to refer others to her attorney. She now looks forward to a new life with a renewed sense of confidence and security.