It can be difficult to come up with a budget for your future living expenses when getting divorced. Most people don’t know how much they have been spending on various things like clothing, groceries, and dining out. It can also be difficult because we need to consider the spouse’s reasonable needs in the future. Things can become even more complicated if the earnings of the parties aren’t sufficient to support two households at the same level they had during the marriage.
Nonetheless, budgets or projections of future spending should be prepared, and a financial expert should take steps to verify the figures and determine if they are reasonable.
What historical period should be evaluated when creating the budget? It is typical to evaluate one to five years of data, but there is no hard and fast rule for the time period that should be analyzed. Contrary to the position advanced in some divorces, future needs are not necessarily based only on expenditures in the last year of marriage. What if spending had been increasing by 10% per year for each of the last five years of the marriage? A case could be made that future needs should reflect a similar increase.
The reasonable need of a spouse can become one of the most contentious areas of the standard of living analysis. What is really needed? Does a spouse “need” to continue to live the same lavish lifestyle that was lived during the marriage? Or is need more narrowly defined to include a reasonable residence and associated living expenses? Was the lifestyle during the marriage needlessly frugal, and should the spouses be afforded to live a more expensive lifestyle based on the earnings of the parties?
One side may argue that the luxuries are not something a spouse is entitled to have, paid for by the other spouse. The other side might well argue that even though the luxuries may not constitute “needs” as defined by the average person, those were part of the marital lifestyle and therefore should be part of the post-divorce lifestyle, regardless of who pays for it.
Whether or not a spouse will have partial or full custody of children may affect this analysis as well. For example, if the spouse will not have overnight visits with the children, a smaller residence may be appropriate. In this case, the standard of living may need to be adjusted to account for a residence of smaller proportion but comparable quality to the marital residence.
Savings may also become an issue when evaluating the standard of living. Should a spouse’s future needs only include living expenses, or should the spouse also be allocated funds that are to be saved? This question becomes especially important when considering retirement savings. Suppose a married couple has been spending $3,500 per month on living expenses while saving $30,000 per year in the husband’s retirement account. Following the divorce, the husband will continue to work and will continue to put money into the retirement account. Should the non-working wife have a similar opportunity to save funds for her later years?
There are lots of considerations when creating the spending budget for future needs, It gets more complicated as spending levels go up. A qualified financial expert (who has done this type of analysis many times) can be invaluable in preparing these numbers.