How Stock Market Declines May Affect A Divorce

June 9, 2022

Ensuring a fair and equitable outcome for your client can become more complicated when stock markets are going through a significant downturn, as they are this year. Investors understand (or should understand!) that stock markets are volatile, but the short-term ups and downs lead to long-term gains. We counsel our financial planning clients to ignore the day-to-day gyrations and focus on the long-term outcome. However, in a divorce, significant investment account fluctuations can complicate negotiations.

For those who depend on dividends, interest, or principal withdrawals to cover living expenses, income may be reduced in a downturn. With lower valuations, the amount that is being withdrawn, if it stays the same, becomes a larger percentage of the overall value. This means the money won’t last as long because it is being withdrawn at a faster rate. To protect against that eventuality, withdrawals may need to be lowered, affecting the ability to cover living expenses. It could also affect the ability to make support payments.

Market declines will affect the value of stock options, restricted stock units, and other stock awards. Often, we include income from vested awards in the budget. Significant declines may even cause the award to go “under water”, which means the value of the underlying stock is less than the cost to exercise the option, rendering the option valueless.

Market declines may also affect retirement plans. If your client was expecting to retire at a particular age or at a set date, the plan may need to be adjusted – which is not usually a welcome suggestion! But working longer can have positive effects, such as an increased pension or a higher eventual Social Security benefit.

Significant changes in account values over a short time span can cause problems when figuring out how to divide assets. If there are multiple accounts, they will probably fluctuate at different rates unless they are all invested in exactly the same holdings (highly unlikely!) In just the time span it takes to work out the divorce, typically 3-9 months, the change in values can be meaningful. Thus, asset divisions may need to be revised periodically.

It is especially important in this type of environment to divide taxable accounts equally. Depending on when each holding in a taxable account was purchased, it will have an unrealized gain or loss. It would be unfair to saddle one spouse with the holdings that have gains while allowing the other spouse to receive the positions with losses, because the losses provide a tax advantage. Such losses can be used to offset gains from other investment sales or to offset other income.

When the stock or bond market is dramatically fluctuating additional planning may be necessary to ensure your client not only receives a fair and equitable settlement but has a strong financial future.

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