Ours is an age where hyperbole has not only become accepted, it is almost universally embraced as a part of American culture, and among the chief advocates of hype is the financial service sector of our economy. We lived throughout the 1980s, 1990s and early 2000s in an age when one could not open a newspaper or magazine without reading the amazing returns on investment that could be achieved by investing with this fund or that. In 2008, when the stock market imploded there was some respite from this enfilade of data on returns. However, as the traditional mutual funds were beaten into retreat, they were quickly replaced by a new creature; the hedge fund. These new investment vehicles promised a faster, better, ride because they would trade with and, when right, against the market. Money fled to these funds despite some enormous loads and aggressive profit sharing demands on the part of the smart guys who established them.

2016 was a watershed. The Dow Jones index grew by 15%; the S&P 500 by 11% and the NASDAQ kept pace at 11%. Meanwhile Barclays Hedge Fund Index barely cracked 6% in a world where the “house” routinely takes 2% up front and 20% of performance. So the 6% hedge fund yield was probably closer to 4%. The three-year average for the Barclays is a measly 3%, making even Treasuries look attractive.

These are the elements of the market that get the hype. And they all have teams of public relations and advertising officials to spin the story their way. However, today’s big news comes from the seldom-heard giants of the investment industry; the defined benefit pension managers. They don’t advertise. In fact, they don’t take customer’s investments. They take public employee retirement contributions and are charged with the duty to make certain the government’s promise to pay monthly retirement payments are actuarially sound.

Today’s news is from CALPERS, the largest public employee pension fund in America. This California agency and its analogues throughout the US manage $3.7 trillion in funds. Their customers are governments that have promised retirees a specified payment every month for life. If they cannot meet their projections, they have to demand that state and local governments pony up larger tax payments to fill the gap. And those governments are already screaming at the large percentage of government budgets allocated to covering pension costs.

So what are the big boys saying? In California’s case, they expect annual returns averaging 6.2% for the next decade. Some years will be better, some worse as the projection is an average. After 10 years, they see returns moving back up towards 8%, but the lower returns in the short run will mean more stress on your local governments to increase taxes.

The Ohio Public Employees system has predictions not much different. 6.76% over the next 5-7 years but then a bounce back towards the 8% that California predicts. Canada and Europe in the past years had lowered their expected returns while the US pension plans retained more flowery predictions. The US plans did not anticipate how far and how long interest rates would crater. The long-term prognosis for higher overall rates of return is premised in large part on a gradual return to historic interest rates.

For public employees, the concern about underfunded defined benefit plans remains. Low rates of return in the past several years have a cascading effect because income projections were not met. The Rockefeller Institute reports that the likelihood of a shortfall in income to distribute is 10x what it was 30 years ago. Subpar returns mean that CALPERS pays out more in benefits today than it receives in retirement contributions. We wrote about this looming problem in May 2016. Recently we spoke with Mark Altschuler who runs Pension Analysis Consultants in Elkins Park, PA. While actuaries, like Mark can project things like present value, it is not within their customary orbit to try to evaluate whether pensions will be able to meet their contractual undertakings to pay each beneficiary the prescribed amount on time.

What does this mean for the divorce practitioner and the client? When looking at the historic rates of return on S&P stocks between 1928 and 2014 the average rate of return today is approximately 10%. Some of that return is consumed by inflation. The other factor demanding consideration is risk tolerance. In March 2000, the SP500 stood at 1,527. It did not return to that value until October 2007. It then fell by more than half and did not return to 1,527 until 2013. The only way to gird against these market fluctuations is to integrate investments in stocks with investments in less volatile bonds. This is strategy that major government pension and annuity managers must emulate. It is also a polestar for conservative money managers. The term “going for broke” can be a self-fulfilling prophecy in the world of investment. So while last year the S&P kicked out 11% and that is 1% more than the 1924-2014 historic average, it would be improvident to build a financial plan exclusively around indexed rates of return. If you choose to believe that kind of growth is sustainable on a long-term basis, we encourage you to read Robert Gordon’s Rise of American Growth (Princeton 2016). So, for the medium term, prepare for 6% returns and be thankful if you do better.

On April 15 of this year, a company called ETSY went public offering 111.25 million shares of stock at $16 a share. This produced what in stock parlance is called a market capitalization of 1.78 billion.  That means what the world thought ETSY was worth.  Once offered to the public it quickly shot to almost $30 a share, doubling its market capitalization. Today, the stock trades below $15.

Sometimes stocks rocket to levels that make them difficult to trade. In 2006 Mastercard went public at just under $40 a share. By 2014, it has risen to more than $800 a share. In order to make the stock more attractive to buyers in January of that year, the company announced a 10:1 split. Thus a person who owned 100 shares of the stock on January 21, 2014, awakened the following morning with 1000 shares.  Eureka! Right? Well not really, because when a stock splits, the price is divided commensurate with the split. So the 818.00 closing price on the day before the split was an $81 price the next morning. The market capitalization did not change. The investor was not enriched. Now typically, Mastercard at $81 a share is an easier stock to buy than at $818 but lawyers and clients need to understand that splits do not themselves create value.

There is also something called a reverse stock split. We saw some of these in the wake of the 2008 recession. When a stock plummets so low that buyers start to equate it with a penny stock, discussion turns to pumping up the price by reducing the number of shares. In 2009 the insurer AIG announced a 1:20 split. The AIG owner who went to bed with 200 shares on one night woke up the next day with 10. Again, the market value of the investment is not changed but the stock now has a price that seems more “dignified”.  Radio Shack is struggling with this issue as we write this. RSH trades for under 10 cents.

When tracing securities holdings this can be important to know.  If husband held 20,000 shares of AIG when he married in 2006, how come he owns only 2,000 today? Dissipation? Transfer to another account to hide the asset. Sometimes a quick check at a website like StockSplitHistory.com can clarify this issue.  Some of the on-line market charts will actually reference a split on the chart. But most charts simply adjust the chart as if the split never occurred because it is the most efficient way to show changes in market price over time. We ran into this recently when a client received a securities account that was 10% lower than the date of trial value in a market that rose 3-5% over the corresponding period. As we examined this, two matters became clear. First, husband’s stock in Apple had undergone a 7:1 split in Summer, 2014 and his heavy reliance upon the future of Russian and oil based stocks had wiped out the gains his other investments had experienced.

There are several sites that provide information on stock splits. It is worthwhile to note this tool in valuing a marital estate.

We periodically report on macro trends in housing prices because our clients typically have a lot of their wealth invested in their homes.  And each time we have a case, one of the questions that comes about is:  Stay or go?

We recently happened upon some data that gives us insight into home values measured over roughly 20 years.  In the early 1990s Toll Brothers began to build luxury homes in central Chester County, about 30 miles Northwest of central Philadelphia and accessible to the city both by train and turnpike.  These were big homes ranging in size from 3100-6300 square feet on lots that were typically one acre.

What was unusual was that we identified seven homes on one street which had sold in the last nine months.  We confirmed that this was not a fire sale caused by the construction of a nuclear plant or abattoir next door.  Moreover the economy of this area is strong with low unemployment.  Median household income in the township where the homes are located ranges near $100,000 per annum.

The homes we examined were all built between 1995 and 1998.  Only one sold more than once during the last 18 years.  So, we looked at what they sold for when built and what prices they commanded in 2013 and 2014.

A.     7/2014 4/4 6300 1        650,000 1995/410,000
B.     7/2014 5/4 4800 2        570,000 1995/435,000
C.     2/2014 5/3.5 5200 1        590,000 1998/335,000
D.     11/2013 5/4 3100 1.2        555,000 1997/341,000
E.    10/2013 4/2.5 4200 1.2        557,000 1996/345,000
F.    10/2013 4/2.5 4500 1        579,000 1995/435,000
G.    10/2013 5/4 3500 1.3        565,000 1995/354,000


Four of the Magnificent Seven were sold in 1995 at an average price of $85.50 per foot.  In 2013-4 these houses sold for $124 per foot.  Over 19 years, the average return comes to 2.4%.  This trails the 2.7% average annual increase in consumer prices over the same period.  It rose from 162 to 245 for the Philadelphia region.

The lesson.  In June 1996 the S&P 500 closed at 670.  Nineteen years later it was just over 1600. So where the Toll Brothers manse increased by 1.45x, an index fund would have increased 2.3x.

Now, we acknowledge, you can’t raise a family inside an index fund.

An index fund does not allow $250-500,000 in gain to pass tax free.

And you can’t margin stock 90% anymore when you can still buy a house with less than 10% down.

But houses are not the investment they were from 1950-2007.  We are in a new age where real estate is not high-yield and risk free.  So, think clearly when choosing to keep a marital residence.


We all know the French proverb; the more things change the more they stay the same.  It has a place in the current controversy over the sudden collapse of Bitcoin’s leading dealer, Mt. Gox. Bitcoin is a virtual or cryptocurrency.  It is an asset that a customer holds in a form where only the asset holder and the person with whom he transacts are aware.

Bitcoins are created through a process termed “mining” by which an investor typically puts up cash in exchange for debits logged on an electronic ledger. Mt. Gox was the largest of the exchanges offering to buy or sell bitcoins at prices determined by supply and demand.  The system was created in 2009.  It soon attracted legitimate businesses because the transaction fees were substantially less than credit cards.  It also attracted customers interested in selling merchandise and services that they did not want traced.  Like most other currency, there are actual coins minted but the system is predicated upon electronic transfer rather than some form of specie.  While Bitcoins have been issued for several years now, the press began to report extensively on this new “investment” when prices rose precipitously from $100 in mid-October, 2013 to $1,100 by years’ end.  Since that time they have declined by half to about $575.

Ironically, the explosion in Bitcoin prices coincided with the announcement by the Swiss government that it would become a party to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.  While the title of that protocol leaves something to be desired, the net effect was lauded as “the end of banking secrecy” in a country long considered the home of the private untraceable bank account.  While this arrangement has not yet been formally ratified by the Federal Assembly (the Swiss Parliament) it is expected to pass as the result of pressure that began with the money laundering traced to the September 11, 2001 attacks and subsequent mass migrations of deposits during the 2008 financial crisis.  Swiss banking giant UBS began to do this in April, 2009.  In July, 2013, the Swiss Courts further opened the door to these kinds of disclosures to US tax authorities.

Today 58 nations are members of the “Convention.”  The purpose of the compact is to permit taxing authorities of the member states to trace the assets of its own nationals beyond the borders of the lands where they reside.  While the list of adherents includes most major countries, the more noted tax havens in the Caribbean have not jumped on the bandwagon.

Why is this topic part of a discussion about divorce?  For decades our profession has dealt with the suggestion that one spouse is holding assets “offshore.”  Inevitably this allegation was met with the lawyer’s inquiry: “Any idea what shore?”  The more famous sites included the following island nations: Bahamas; Cook, Caymans, Leeward, St. Vincent & Grenadines.  In addition, Dominica, Liechtenstein, Lebanon, Panama and the Philippines were found on a list compiled by the Financial Action Task Force.   Israel, Lebanon, Russia and the Philippines have also been named as potential hideouts.

Bitcoins offer a new haven and one that an investor need not visit to open an account.  In addition Bitcoins are but one form of cryptocurrency. Wikipedia currently lists nine other forms of this new financial instrument and suggests that there are more than fifty others.  See Cryptocurrency; Digital Currency.

The danger is that a spouse wishing to hide assets now has an untraceable means to accomplish his or her purpose.  If there is good news, it is that these forms of assets are highly volatile and some economists have suggested that these kinds of systems are not sustainable.  Typically, once fiat or government regulated currency enters these markets it is not exchangeable for any other form of hard currency.  It may be exchanged or other virtual currency but unless these other systems survive, there is risk that the entire investment could be lost.  If it is hacked or otherwise stolen there is essentially no recourse.  But people determined to keep money away from the claims of a spouse may be willing to absorb that risk.

Bitcoins received another blow this week as the IRS announced how it would deal with them.  The Service announced that bitcoins were not currency but property and were therefore treated as capital assets for which gain and loss needed to be reported.  Thus, if you acquired a bitcoin at $700 and used it in 2013 to acquire a piece of jewelry worth $1200 (because the bitcoin had appreciated), your jewelry purchase was not merely an asset acquisition but a capital gain as well since your $700 investment allowed you to purchase a $1200 asset.  The guidelines also indicate that exchanges that make a market in bitcoins will have a duty to report transactions to the IRS.  How much compliance the exchanges will provide with that regulation remains to be seen.

This question is one that financial planners want us to focus upon every day in their quest to increase our savings rates and their assets under management.  We have previously reported on this subject in earlier blogs but one of the leading retirement savings managers, Fidelity Investments, published its findings on this subject last month.  The story was the subject an amusingly contentious video clip posted on October 25 on MSN in its “Money” column.

Fidelity should have some knowledge on this subject.  They manage 12,000,000 retirement accounts.  The average balance is just over $70,000.  But as with any prognostication, estimating costs decades ahead can be a frightening subject for any economist.


Fidelity’s conclusion as to required savings rates are expressed in terms of annual earnings. Their report concludes that by age 35 your savings for retirement should equal your salary at that time. Thus, if you are making $70,000 a year, by your 35th birthday you should have $75,000 invested.  But the number climbs precipitously after that:  For our discussion let’s keep the salary fixed at $70,000.


Age                         Salary                     Salary multiple     Target Retirement Account Balance

45                           70,000                   3x                                            $210,000

55                           70,000                   5x                                            $350,000

67                           70,000                   8x                                            $560,000


Fidelity assumes that their deposits will grow long term at the rate of 5.5%.  The model is built upon the concept that a 25 year old would invest 6% of his earning and increase it by 1% per year until the rate reaches 12%.  A 3% employer match is also assumed. Of course the 5.5% return is no more guaranteed than the cost of health insurance at age 67 can be estimated.

T. Rowe Price has issued a similar model but it concludes that a retiree at 67 will need 12x final salary or $840,000.


These targets can be helpful as a benchmark.  But as we have stated in the past, retirement is not only a function of saving but formulating what your lifestyle will be once you have retired.

Most financial planners say that your expenses in retirement will be different but only 20% less than they were while you were working.  We have recently seen a spate of clients nearing retirement who have undertaken major debt to help a child through graduate school or some other seemingly worthy enterprise.  This has prevented retirement savings or even worse; resulted in huge obligations that retirees really won’t be able to pay off once they leave the workforce.  It is one thing to profess that you will work until you drop.  But, many of us don’t seem to realize that health problems could force retirement upon us.

The Weekend Edition of the Wall Street Journal on February 19-20 reported on something most of us already knew:  Americans are not saving enough for retirement. The proposition is old but the data is new and, therefore, worthy of attention.

Why is this germane to a series on Separation and Divorce?  That’s easy.  In divorce we divide retirement savings that a couple has accumulated during the marriage.  In many instances the savings for retirement were calibrated based upon the principle that two live almost as cheaply as one.  But when the two go their separate ways, the economies of scale go out the door with them. That means re-thinking retirement plans in realistic ways.


The Journal’s research comes from several sources including Boston College’s Retirement Research Institute.  Roughly 60% of Americans approaching retirement have 401(k) plans.  Almost all Americans are eligible for some form of social security payment. These two devices are the engines of retirement income. The Boston College data shows that households headed by folks ages 60-62 with 401(k) type plans have median income of $87,700 in 2009.  The benchmark of most financial planners is that in retirement you will need 85% of your pre-retirement income to enjoy a comfortable lifestyle.  Eighty-five percent of $87,700 is $74,500 per annum or just over $6,000 a month.  For these median Americans social security will provide about $35,000 in income.  So the “gap” between the income target and the social security benefit is about $39,500, or $3,300 a month.  That’s where retirement savings on the individual’s part comes in.  The typical 401(k) for our near retirement couple is averaging $150,000.  New York Life Insurance would suggest that the balance be funded with a fixed income annuity.  An annuity through NY Life, however, throws off only $9,000 in income, or one-quarter of what we need based on current returns.  To get the income up to $3,300 with a quality annuity would require an investment base of $630,000.


About half of those on the cusp of retirement also have defined benefit retirement plans. These plans are a form of annuity themselves and the typical retiree with a defined benefit plan can bank on $26,500 a year or roughly $2,200 a month upon retirement.  For those folks the shortfall that must be made up by savings is only $13,000 a year.


All Americans over 30 years of age should be looking at how these numbers affect them. Admittedly young people view retirement as someone else’s problem. But the longer retirement contributions are ignored, the more implausible a sound retirement becomes because the funds do not have enough time to build value through investment.  The starting point is to assess what is projected to come from social security.  From there on, it is mostly going to be individual retirement contributions that will make the difference as defined benefit plans paying out monthly stipends continue to evaporate from the private sector.


Vanguard Group has recently increased what it deems to be the model for retirement savings from 9-12% of income to 12-15%. This means that couples with household income of $100,000 a year should be funding retirement savings at the rate of $1,000-1,200 a month.


As we noted at the outset, reassessment is required when a couple divides their retirement and doubles their expenses by moving from one household to two.  Commonly the impact is to defer retirement and scale back lifestyle expectations when it does occur. This is, for most, a price of divorce that cannot be avoided.


Bear in mind, the Journal does not discuss this, but we counsel clients to think carefully about what their expenses will be going into retirement.  The conventional wisdom is that living expenses constitute 85% of pre-retirement income.  However, upon retirement two large pieces of modern household budgets often change dramatically.  People who take on a 30 year mortgage at ages 30-35 should have satisfied that mortgage by the time they retire.  The home mortgage is commonly the largest single household expense.  The second largest is health insurance and 65 is the age when Americans become Medicare eligible.  Most of us will buy a supplemental policy at age 65, but we can hope that this coverage will be less expensive than the private plans we now pay to maintain.


The other thing to be learned from the Journal article is to invest conservatively.  The sad stories recounted there frequently involved folks who “took a chance” on investments calculated to make them wealthy rather than secure a retirement.  As most of us who were invested in 2008 learned, many of the high flying investments in real estate or start up companies crashed and burned in the last recession.  Sadly, that money is not coming back for those who are the vanguard of the baby-boom retirees.

Lawyers are not financial advisers but we do lots of real estate transactions and for most divorce clients, the largest asset in the portfolio is the family home.  So in just about every matrimonial case, there is the inevitable question.  Should we hold or is it time to fold?

It’s always good to study the data.  And the news for our region for the second quarter of 2009 is relatively good.  Prudential Fox and Roach reported the first region wide increase in housing prices in two years.  The biggest increase was in the city (6.8%) while the suburban increase was less than half that (2.7%).  There had been a sharp decrease in the first quarter of the year.  We have also weathered the storm well compared to other large cities. Philadelphia prices have declined 12% from their peak while average declines in the ten largest cities was closer to 30%.

Inventories (homes listed for sale) are leveling off and there is an increase in the rate of sale of those houses in inventory.  This has meant a reduction in the number of days it takes to sell a house.

So, does that mean the end of the downturn is over.  Even the experts a Fox & Roach hasten to note: “Those expecting a near-term return of 2005’s peak prices will be sadly disappointed.”   Within the region, the worst sales markets were Camden and South Jersey (down 10-11% in the past year) while Trenton area fared best (down 0.5%).  The Philadelphia market fell 5.31%.

While the second quarter offered an uptick in the rate of sales, it still took 20% longer to sell a home in June 2009 than it did June, 2008.  The average house sold was on the market more than three months.  If no new homes were listed, the 2,500 homes on the market would still take almost a year to clear at the current rates of sale.  That number has changed very little from last June.

Homes are not just places to dwell in.  They are an investment.  And since the collapse of the dot-com bubble of 2000 Americans have invested heavily in their homes.  We have been taught and there is data to show that homes can be a good investment.  What most of us tend to ignore is the fact that value is a moving target. And in markets like Phoenix and LasVegas, where prices have declined an average of 33% in the last 12 months the picture is especially clear.

Let’s use LasVegas as an example.  Let us say that in April you owned a house in that market in which you had equity (price $300,000 –debt of $200,000) of $100,000.  A buyer approaches you and offers you $300,000.  But you bought the house for $450,000.  So you decide to wait and turn down the offer.  Between April and the end of July, the data show that you lost another 2.6% on average.  Now suppose you took the offer and took your equity of $100,000 and put it in an S&P index fund, it would have risen to $130,000.  So your decision to hold cost you $40,000 between the loss on what you had and the money you failed to make.

Home equity is an engine of potential wealth.  We are not advocating irresponsible borrowing but home equity is trapped wealth except in times when home prices are rising. And with the inventory of homes still out there, it is going to be a long time before we see prices rise.  Bear in mind also that the increases reported earlier in this piece come at a time when interest rates are at historic lows.  As interest rates rise, price increases in homes will inevitably face the headwinds of increased interest rates.  So, if you bought at the height of the market, realize that in your quest to recover your losses, you may be foregoing the opportunity make real money in other investments.

In case you are one of those driven under a rock by the economic news of the past few months, you may have missed the latest news.  One of Wall Street’s most prominent investment advisers appears to have walked off with $50 billion dollars in what may qualify as the largest Ponzi scheme in world history.  For once, it wasn’t the little guy that got hit.  The client list for Madoff Investment Securities included some of America’s wealthiest investors. Sadly it also included some of the charities underwritten by those investors.

So why are the divorce lawyers writing about this? Because every day we are meeting with folks who don’t understand their investments and tend to buy based on “reputation” instead of the facts. Worse, they own things like hedge funds or derivatives without knowing what these things are.  These “country club investments” (based on the locale where they tend to be sold) can and often do transform rich people to middle class in a hurry. 

The defenses we commonly hear aren’t very good.  1. My spouse handles all of this.  2. We wanted to please a customer or client.  And worst of all:  3. The returns were too good to pass up.  Ask Mr. Madoff’s clients.  Indeed, they were too good to be believed.

It is pretty common during an initial interview to ask a client about an investment only to discover that the client doesn’t know how it works. It is common to see clients who have millions in life insurance but not a penny of disability insurance.  It is not uncommon to see 80% or more of an employee’s retirement invested in the stock of the employer. Presumably, this means that the collapse of Enron could not occur again.  Until Bear Sterns and Lehman Brothers did it again in 2008.

Certainly, it must be conceded that even the blue chip securities took it on the chin in the fourth quarter of 2008. And the Lipper Indices shows that the pain was felt across the board among the mutual funds.  But there are plenty of companies that have seen 80 -90% declines in their stock prices.   Are you qualified to decide when to hold and when to fold?

There are two kinds of money in this world; gambling money and retirement money.  Investors tend to ignore the distinction. If you have made it to age 40, there is a good chance you will live to 90.  That makes for 25 years of retirement.  At 40 we see little reason why we can’t work until we are 90 if we need to.  But, ask the person who is 70 what employment options he or she has. And if you are 40 with little saved for the golden years, investments in satellite radio or Philippine gold mining are not the way to make up for your refusal to save earlier.

The corollary to this rule is that if you are married to one of these riverboat gamblers you need to realize that you may be lashed to the mast of the boat. If I save and my spouse does not, there will be only one retirement fund to live on.  And should my nonsaving spouse decide to dump me and move in with my wealthy neighbor, chances are we will be dividing my retirement savings.

So what are the rules?

1.       Save for retirement like you mean it.

2.       Make your spouse do the same as soon as realistic

3.       Find a professional to manage your retirement money.  Make certain that professional

is SIPC insured and that every aspect of the investor operation appears transparent.

4.       Challenge your professional to produce returns.