Dividing A Pension in Divorce - Why Trading A Pension For Another Asset Is A Gamble

Hey, everyone. Scott Levin, Chief Peacekeeper, and I am here with my good friend and colleague Lori Itkin. Hi, Lori.

Hi, Scott. How are you today?

I'm doing wonderful. So as a mediator, I often refer out questions about the value of different financial instruments to experts like Lori Itkin. Lori is a certified divorce financial analyst. And she has an incredible history of working with my clients to resolve and understand the value of all sorts of assets, especially and oftentimes pensions. So I thought today would be a really interesting topic to talk about. You know, there's pension in the divorce. What are your options for handling that asset? During the divorce, and how do you go about dividing it or sharing it in some way? So I guess, Lori, before we jump in, do you— in your practice, how often do pensions and the value of pensions come up?

Yeah, it's very common, as you know. I mean, we practice in California, and CalSTRS pension— you're a teacher in the public school system, CalSTRS. We also have PERS. And we may have a lot of pensions from— that are due to people who have worked in the public safety field, often dangerous, often very stressful, and they feel they've earned the pension and may not really understand why it has to be shared with their spouse.

Exactly. And so just to kind of just differentiate a pension from a 401 or another retirement vehicle, basically A pension is a promise from your employer to pay you a certain amount of monthly benefit for the rest of your life upon retirement. Do you have any differentiation or anything to add on that definition, Lori?

Yeah, it's— I work on a lot of cases where the survivor benefit— I'll just go into one little detail here because it can get— we don't want to get too much in the weeds, but often when you are selecting What you are going to receive as a monthly benefit, you actually have choices. You can choose a single life annuity, which will give you, the pension holder, the highest monthly benefit, or you can choose to take a little less but leave a survivor benefit in some ratio or percentage to perhaps your spouse, maybe children. And oftentimes the conflict comes when you're getting a divorce. You really don't want to leave any of this to your ex-spouse. So that gets into the negotiations as well. But this is different. You know, basically you might have a 45-year-old person who may not retire till 65, maybe 55, maybe they don't know. And it's going to— and all we can get are estimates of what you may be paid as a monthly benefit 15, 20, 25 years in the future. So with a 401, a 403, you can pull up that June 30th statement and say, aha, it's worth $287,000. You get half. Can't do that with a pension. You have to value it. And that's a whole different ballgame than just eyeballing an account balance on a statement.

And because oftentimes people— Lori mentioned, like, for firemen and police officers and Even teachers, the pension is really emotional. There's emotion attached to the pension. Like, hey, this comes up all the time in my mediations. Like, I earned that. I went to work sick. I went through, you know, not snow in California, but, you know, rain, sleet, snow. I got shot at. I went into that burning house. You know, that has emotion attached to it. So it's not just a dollar and cents. There's also some emotional attachment to it.

And it's a mandatory contribution in many cases where you'll find, why does a teacher get paid less than somebody in the, in the private sector? Because they may be making an 8% mandatory contribution from their paycheck, every paycheck, 8%. We have universities, sometimes it's 7%. They have no choice. Whereas with a 401, Scott, you have a choice. Do I want to contribute or don't I? So a lot of emotional issues.

And because of that, along with all sorts of different things, a lot of people going through divorce in California like to try to explore the trading of the pension. So rather than me taking the portion of the pension that I would be entitled to for my spouse upon their retirement, let's, let's let them have the pension, but I get something different. But to do that, to make that trade, the first step is to what? Value it. Have some sort of understanding of what the pension is worth. Lori, you say it better than I do. What are your thoughts about valuing a pension now for something that might not happen in 10, 15, 20 years?

Yeah, the biggest mistake is, um, you might get— if you are an employee and you're covered by the pension, you may get a document that shows you how much you contributed to that pension over the years. I see $30,000, $100,000, $50,000. That— and then they pass that off, usually without knowing that that's incorrect. But that's incorrect because your monthly payments in the future are not only taking what you contributed into consideration, but the match that the pension fund is investing on your behalf. I mean, these huge pension funds have Billions of dollars when we look at the country, and they're invested in hedge funds and stocks and real estate and all these things. So, so you have to value the pension, and it's not what the number is on this statement. So how do you value a pension? You can go to an actuary, and I'll just tell you, I'm going to briefly tell you which value variables are most important in doing this calculation. We are going to want to have an estimate, maybe from your employer, what your monthly benefit may be if you continue to work at the same salary level. Or maybe a higher salary level, whatever their estimates are, till your retirement age. Could be 55, it could be 65. We need to know that, and that's already inaccurate because we don't know if you're gonna work that long. We don't know if you're gonna get bumped up in some other position. Number one. Number 2, we need to do a discount rate. You are getting paid in the future, money in the future. Is not the same as money in your hand today. Because in my hand today, if I have $100,000 today, I can invest it and get 5% a year compounding. So we need a discount rate. And the value of the pension totally differs if that discount rate is 5%, if it's 3%. And let me tell you, if you are not in mediation and you are working with 2 attorneys, one expert will say, ah, Scott, you could invest that and get 5%. So really the offset is less. And then the other person will say, no, you know, you can only get 3% risk-free. And, and all of a sudden now you're trying to trade an asset. You have one expert saying the pension's worth $500,000 and one expert saying it's worth $800,000. Well, what is it, Scott?

Who knows, right?

Crapshoot. And what if you die before you even get the pension? And if you have not elected a survivor benefit, that pension may not be paid to anybody. No ex-spouse, no children. So it is a crapshoot. Valuing a pension is a crapshoot. So when I'm a neutral analyst to a couple, or even when I'm an advocate, I make it clear that there is no right answer on the value of this. And if you want to keep the house and the other spouse keeps the pension, It won't be a fair trade. We just don't know who's better off, you or your spouse. Crapshoot.

So what recommendations do you make when someone like me brings a couple like that in mediation, or even when in litigation, when you're brought into a situation just to work for one person and they say, you know, I have this pension or my spouse has this pension, you know, what do you think I should do? Do you have a— is there one set of answers, or does it depend on the spouse's age, how long they've worked for the company, how long they've been married, all those things?

Well, if you want the most equitable division— equitable, and you can define that however you want to define that— but if you want the most equitable division, you would want to divide the marital portion of said pension. Marital portion, a simple way, in general, it's called a coverture fraction, where we take— if the employee had been employed for 15 years, And they had been married between the date of marriage, the date of separation for 7 and a half years, then the community property portion is 50%, not 100%. So we don't split it in half. Now it also we may have one spouse maybe 20 years younger than the other, so the monthly benefits are going to be different. But anyway, you can do this. Many pensions use a qualified domestic relations order to divide them. That means if you're 45 today, your spouse is 45, and your spouse. retires at 65. You don't know now when he or she's going to retire, but if and when they retire, you know that you are going to get a portion of their pension. Or sometimes you may even be able to collect on that pension, on your share, before they actually retire. Lots of nuances to this. But that is the— what I consider to be the fairest way to do this, because you at least have some inkling that it is Equal or equitable. Now, some people don't want to do that because, as you said, I am keeping my pension, and some people want to keep the house.

So when going back to when, if you do, if you go through the the quadro process or a version of that, let's say that you are not of retirement age, but your spouse is. Does that affect anything? Just—

it can. It depends. It depends the pension. It depends. There's different methods of segregation, and in some cases you may be able to collect before or after your spouse collects. In some cases you may have to wait until your spouse collects.

And in terms of if your spouse predeceases you prior to retirement age, Are there things that you can do to reserve your right to your portion of their pension?

Now, that is a very good legal issue that must be addressed. Do not— and I think the trainings that many of us in our ecosystem of divorce take remind us very much of that, that what happens if the person dies before they reach retirement age? Does anyone get anything?

And, and, and if you have a survivor's benefit, or if, if you have the QDRO in place, does it matter, um, if your spouse, uh, dies while they're, while they're eligible to take their pension? Like, they've, they've reached retirement, they're taking their pension, you're receiving your portion. Is there any way that their death at that point could affect it?

It, it, it depends which method of division you have chosen.

Okay.

And you have to have that addressed. The QDRO, the Qualified Domestic Relations Order, it's a very boring document customized to each pension plan. And these are the issues that must be addressed, and each client should understand what they're agreeing to.

And what about taxes and pension benefits? Do you have any thoughts about how—

I sure do. We have fun together, don't we?

Yes, we do.

Oh my gosh. So remember that when you receive your pension, especially you live in California, in most cases you are likely going to have to pay federal and state income tax on that pension. How much? It depends what your overall income might be at the time, right? Same thing, you might be getting Social Security. Now, of course, That's another issue. Certain pensions you have not paid into Social Security, so you don't get Social Security, which is another complicating factor. But you— we would just— you would just pay taxes likely based on your tax bracket those years you're receiving payments.

Do you have any overall kind of— I know that you're— the fairest way to kind of deal with this is let's split it at the time of retirement, but doing it now during the divorce, Rather than kind of doing the crapshoot model, which is, hey, we'll trade it off, but we're really not going to know with with a real degree of certainty what its present-day value is. That that's that's kind of the basic takeaway of the.

And if it's not a house you're trading for the pension, it might be IRAs or 401s you're trading for the pension. Yeah, so it's fine. I mean, for my clients, if they Want— it's all a negotiation, right? You're the master. You're the chief peacekeeper. If somebody really wants that house, they will do anything for that house, and they may waive their rights to spouse's pension. They better know they're doing it, because once you've waived your rights, that's a problem if you change your mind.

Oh, have you ever had a situation? Have you heard of someone changing their mind later?

The issue that I get that is, is different than that, but it's prevalent, is I have people contact me. They're divorced. I kid you not. 10, 15, 20, even 25 years ago, and they never filed the QUADRO. Now they're like, hey, my ex is retired and collecting. My daughter tells me he's collecting, blah, blah, blah, blah, blah. Well, tough, tough, tough. You know what?

Yeah. Do you have a solution for them?

And, well, I've even sent them to attorneys, and I don't— most attorneys don't want to deal with that.

Yeah.

I mean, have you found anyone who was? Because give me a referral.

I get calls from people all the time that say, hey, we, you know, I would just— like you said, divorced 5, 7, 10 years ago, but we never did the QDRO. And I'm always like, I'm like, I'm not the person to help you, but, you know, I wish you would have done it 5, 7, 10 years ago.

That's the message. You may be so exhausted after the divorce. The number one thing when I work with a newly divorced client is I say, we are going to read the marital settlement agreement or divorce decree together. We are going to place some action items of things that you need to do. Now, often the spouse with the pension will not cooperate, and that's out of my, uh, my role. I can't compel anyone to cooperate.

That's for sure. Now, will you get involved with that actuarial, trying to figure out the present-day value of a pension? Is that something that you work in?

So I can do that. I have the software to do it, but I actually prefer referring people to a pension specialist who does only pensions, who can write up a nice fancy report, who can gather all the data and do it in a timely manner. So I certainly can walk someone through the pension valuation and look at the inputs, but I prefer that somebody who's dedicated to that do them. And there's a lot of affordable people. You know, you can get pension valuations for well less than $500, even $300.

Yeah, that's amazing, isn't it?

Yeah.

Lori, in general, tell us, tell us how you come into play. Like, when should someone consider calling you if they're going through mediation or traditional divorce litigation?

So I practice, I'm based in San Diego, but I practice throughout California with Zoom. People contact me when they're contemplating divorce. They contact me when they're in mediation. They contact me when they're in litigation. I'm a good resource if you are trying to understand the financial implications of any type of settlement proposal you're trying to make or evaluate with your spouse in whatever forum, you do that.

Clients of mine have worked with Lori to understand the value of RSUs, to understand their division options, like she said, of different assets and debts, unfortunately. And sometimes divorce is more about dividing the debt than the assets, and those are always tough cases.

Absolutely.

But thank you, Lori, for joining us today and I just cannot recommend Lori with, with more confidence and in more forthright. She's just, just done amazing for those clients I've referred to, and she just has a sparkling reputation. So thanks for being here today.

Thanks, Scott.