I've always been dismayed by the incredibly nasty fights people have about money when they get divorced. Clearly, there are all kinds of factors that are involved -- hurt feelings, betrayal, custody of the kids, and the list goes on. But the loss of trust -- the sense that your partner is no longer a part of you, but has become a third party -- must be playing a major part in the suspicion that instantly arises about who is getting and giving what financially.
Fueling the divorce fires is the enormous complexity associated with our financial lives. The tax and social security systems have made understanding our finances impossible without highly sophisticated software. So two X spouses can easily reach opposite conclusions about whether a proposed settlement is fair just because they can't sort out all the complexities.
Economics to the Rescue!
If you are in the midst of a bloody divorce or know someone who is or are just interested in the issue, take a look at my recent forbes.com column posted at
http://www.forbes.com/2010/07/07/divorce-settlement-alimony-child-support-personal-finance-kotlikoff.html
This column shows that with ESPlanner (Economic Security Planner) software my company developed, we can now boil down all the complex financial factors associated with divorce settlements into two numbers -- his and her living standards. The software's dirt cheap compared to the stakes involved, but there's a free version that can get one a long way to a fair divorce settlement at www.esplanner.com/basic.
What's "fair" in divorce is up for debate. Providing each spouse the same living standard is one reference point, particularly for marriages that have lasted a long time.
But the great thing about using ESPlanner to sort out one's divorce settlement is that it shows both X's that divorce can be a win-win situation at Uncle Sam's expense. Should the high-earning spouse make alimony payments or just hand over more taxable assets? Should she/he keep the house with its mortgage deductions or rent? Who should receive or retain Roth vs. Non-Roth IRAs?
There are so many things to argue over in divorce. Why argue over financial conjectures that may be false, when you can sort out the financial truth so quickly? Life is unfair. So is divorce. But divorce can be a lot simpler and fairer if you let economics show you the financial truth and help you make the best out of a bad situation.