How do you compare two divorce settlement proposals?

Why headline numbers are misleading

Two settlement proposals might both offer $500,000 in total assets. But if one is in a traditional 401(k) (fully taxable) and the other is in a Roth IRA (tax-free), the after-tax values are very different. If one includes a house with high carrying costs and the other includes liquid investments, the cash flow is very different. The comparison must go deeper.

The five factors to compare

1. After-tax value

For each asset in each proposal:

• Determine the tax basis (for investments and real estate)
• Identify the tax treatment (capital gains, ordinary income, tax-free)
• Calculate the estimated tax upon sale or withdrawal
• Subtract selling costs (for real estate)
• Compare after-tax values, not face values

2. Cash flow

For each proposal, model the monthly cash flow:

• Income - salary, alimony, investment income
• Housing costs - mortgage/rent, property taxes, insurance, maintenance
• Living expenses - food, transportation, health care, personal
• Debt service - credit card, loan, and other debt payments
• Net cash flow - income minus expenses

A proposal that leaves you with negative monthly cash flow is not sustainable, regardless of the total assets.

3. Liquidity

Some assets are easy to access; others are not:

• Liquid - cash, savings, brokerage accounts, retirement accounts (with rules)
• Semi-liquid - investments with some restrictions
• Illiquid - real estate, business interests

A proposal with more total value but all in illiquid assets may leave you unable to cover expenses.

4. Debt

Each proposal should account for who assumes which debts:

• Mortgage - who keeps the house and the mortgage
• Credit cards - who pays them off
• Auto loans - who keeps the car and the loan
• Business debt - if a business is involved
• Tax liabilities - any outstanding tax debts

A proposal that gives you more assets but also more debt may not be better.

5. Long-term growth

Model both proposals forward:

• 5 years - near-term sustainability
• 10 years - medium-term position
• 20 years - long-term retirement readiness

Factor in:

• Expected investment returns - based on asset allocation
• Inflation - erodes purchasing power over time
• Asset appreciation - for real estate and businesses
• Retirement account growth - tax-deferred or tax-free compounding

How to model the proposals

Step 1: List every asset and debt in each proposal

Create a side-by-side comparison of what each spouse receives and owes under each proposal.

Step 2: Calculate the after-tax value

For each asset, subtract the estimated tax and selling costs to get the after-tax value.

Step 3: Project the monthly cash flow

Using the standard of living analysis, project the monthly income and expenses under each proposal.

Step 4: Model the growth over time

Using reasonable assumptions for investment returns, inflation, and appreciation, project the net worth under each proposal at 5, 10, and 20 years.

Step 5: Compare the results

Which proposal leaves you with:

• Higher after-tax net worth at each time horizon?
• Sustainable monthly cash flow?
• Adequate liquidity?
• Less debt?
• Better long-term growth potential?

What if the proposals are close?

If two proposals are very close, the deciding factors may be:

• Risk tolerance - which proposal has more market risk?
• Simplicity - which is easier to manage?
• Emotional factors - keeping the house vs. starting fresh
• Flexibility - which gives you more options?

Factors that typically matter

• After-tax value - not face value
• Monthly cash flow - can you sustain the lifestyle?
• Liquidity - can you access the assets when needed?
• Debt allocation - who assumes which debts
• Long-term growth - 5, 10, and 20-year projections
• Inflation impact - erodes purchasing power over time
• Risk - market exposure, real estate risk, business risk
• Tax consequences - capital gains, retirement taxes, alimony treatment

Documents commonly reviewed

• Both settlement proposals - the full terms
• Asset statements - current values and bases
• Tax returns - to estimate effective tax rates
• Mortgage and loan statements - debt details
• Standard of living analysis - monthly spending baseline
• Income records - salary, self-employment, investment income
• Retirement account statements - traditional vs. Roth
• Brokerage statements - cost basis and unrealized gains

Common mistakes and misconceptions

• Comparing face values - the most common mistake
• Ignoring tax consequences - capital gains, retirement taxes, alimony treatment
• Not modeling cash flow - a proposal with more assets but negative cash flow is unsustainable
• Overlooking debt - more assets with more debt may not be better
• Not projecting forward - a proposal that looks good now may be worse in 10 years
• Ignoring inflation - $500,000 in 20 years is worth far less than $500,000 today
• Deciding based on the biggest number - the biggest number may have the biggest hidden costs

When a professional may be useful

A CDFA® can help by:

• Calculating the after-tax value of every asset in each proposal
• Modeling the monthly cash flow under each proposal
• Projecting both proposals forward over 5, 10, and 20 years
• Factoring in taxes, inflation, growth, and carrying costs
• Identifying hidden costs and risks in each proposal
• Comparing the proposals side-by-side in a clear, defensible format
• Helping you understand which proposal leaves you in a stronger financial position