A Tough Lesson in the Economics of Divorce


Jennifer Merkel, 39, knew ending her 11-year marriage would be devastating emotionally. What she wasn’t prepared for was how much it would cost her financially.

Merkel, a Pasadena school administrator, lost a large portion of her pension in her 1997 divorce and had to pay alimony for a year. She wound up with the house, but borrowed $50,000 from her parents to pay her part of the property settlement.

The experience left her both bitter and determined--bitter about the financial and emotional losses, and determined to take care of herself financially.

“I’m it, it’s just me, and when I’m 65, it’s still gonna be me,” Merkel said. “I should have relied on myself years ago.”


What Merkel experienced was fairly typical for men and women who make more money than their soon-to-be ex-spouses, said Victoria Collins, an Irvine financial planner and co-author of “Divorce & Money: How to Make the Best Financial Decisions During Divorce” (Nolo Press, 1998).

Indeed, the financial consequences of divorce can be so severe that many planners urge their clients to work on a troubled marriage before heading to the courts.

“The financial reality [of divorce] may continue for a long time because you have less cash flow, less assets and you may have ongoing financial obligations such as spousal support,” Collins said. “While I don’t recommend people stay in a bad marriage, they really need to look at the finances in order to make an intelligent decision about whether divorce makes sense.”

Time to Rebuild Financial Life


Fortunately, Merkel is still relatively young and she has many opportunities to rebuild her financial life, Collins said. As dean of students at John Muir High School in Pasadena, Merkel has a $66,000 yearly income and opportunities for advancement.

Unlike many private sector workers, Merkel has a pension, which is provided by the California State Teachers’ Retirement System. She also has the opportunity to invest her own money, tax-deferred. In addition, she can save $2,000 a year in a Roth IRA, which would give her tax-free income in retirement.

Merkel needs to start making the most of those options right away, so that she can be comfortably prepared for retirement, Collins said.

Right now Merkel has a net worth of about $215,000, mostly from equity in her La Canada home. Nearly half of her gross salary goes toward paying her mortgage, property taxes and associated home costs. Merkel has little savings outside of her pension, and her emergency fund has been depleted by home repairs.

Merkel also owes $50,000 to her parents, money she borrowed to help pay alimony, a $30,000 property settlement to her ex-husband and her legal fees. Merkel pays the loan back at $1,000 a month, although she said her parents would accept smaller payments.

“My parents are well-to-do, so I don’t have to pay it now if I don’t want to,” Merkel explained. “But part of my inner spirit is never to be in debt to anyone.”

Merkel said she did not worry much about saving when she married her husband, a salesman. She says the couple enjoyed a combined income of $120,000 for several years, with her income then about a third of the total, before his income dropped after a series of job setbacks.

“It was easy to rely on his income because he was doing so well. So I just kind of thought, ‘Oh well, I’ll just stay in this job, and I’m not going to pursue anything [more],’ ” Merkel said. “And so when the relationship ended, I realized, oh my, here I am starting all over again.”


Merkel said she should have concentrated more on her own career, looking for job posts that could have increased her income. She might have even pursued her dream to become a doctor; she now spends one day a week volunteering in the emergency ward at Verdugo Hills Hospital.

As it was, Merkel was making significantly more than her husband when the marriage ended, and was required to pay alimony temporarily. Divorce documents show she was making $52,000 compared with his $11,000 at that time.

Retirement Benefits Split in Divorce

Merkel was also required to split her retirement plan. Retirement benefits earned during a marriage are community property in California, to be shared equally regardless of which spouse technically earned them.

The teachers’ retirement system offers two options for splitting a retirement kitty.

* The ex-spouse can wait until the teacher retires and then receive a portion of the teacher’s monthly pension amount. The portion is determined by the number of years the marriage lasted, the teacher’s salary and how long he or she contributed to the retirement system plan.

* The second method divvies up the pension at the time of the divorce and sets aside a certain dollar amount in a separate CalSTRS account from which the ex-spouse can draw once he or she turns 55. The dollar amount is determined by taking half of the teacher’s length of service--known as the service credit--as well as half of any contributions made and returns earned during the marriage.

Merkel’s spouse chose the latter method, which meant that Merkel lost five of the 10 years of service credit she had earned during the marriage, as well as half of the money she and her district had contributed and half of her account’s earnings--an amount equal to about $21,000 at the time.


Both methods have about the same effect on the teacher’s final pension, but which one is chosen can make a big difference for the ex-spouse, depending on how long the marriage lasted and how long the teacher teaches, said Sherry Reser, CalSTRS spokeswoman. Since Merkel’s ex was already over age 55 at the time of the divorce, he was able to take the money out in cash rather than waiting years for Merkel to retire.

The divorce means Merkel will have to work longer or accept a lower pension payment than if she had stayed married.

If Merkel continues working for a school district, her pension will replace about 32% of her salary if she retired at 55. Working a little longer would give her a much larger pension--56% of her final salary if she retires at age 60 or about 73% at age 65. Had she not divorced, she would have been able to replace 73% of her income at age 60 and 84% at age 65.

Since most retirees need 70% to 80% of their pre-retirement salaries, and since Merkel could live 30 years or more in retirement, she needs to save more on her own, especially if she wants to retire early, Collins said.

Collins suggested Merkel get her parents’ permission to reduce her monthly loan payments to them and use the extra money to invest in the 403(b) plan offered by the teachers’ retirement system. Contributions to the 403(b) are taken directly off the top of her salary, so that she doesn’t have to pay current income taxes on the money, and the contributions can grow tax-deferred.

Even $500 a month, if it earns an average 8% interest, would give Merkel a $325,000 nest egg at age 60 and $521,000 at age 65.

Merkel said she was not aware that she was eligible to participate in the plan, which allows participants to choose from 1,800 mutual funds and has fees that run about half the cost of the average 403(b) program.

CalSTRS has been trying to publicize the program, but is competing with about 200 other vendors, including other 403(b) plans, that provide retirement programs to school districts, Reser said. Most of the other vendors are insurance companies that offer teachers tax-sheltered annuities--traditionally the more common, and expensive, option for teachers trying to save more for retirement.

School districts must pass a resolution allowing their teachers to participate in the CalSTRS 403(b). Both Pasadena Unified and its larger cousin, Los Angeles Unified, have done so, Reser said.

(More information on the system’s 403(b) plan is available at its Web site, or by calling [800] 699-4032).

Once Merkel has contributed the maximum to the 403(b), she should consider putting $2,000 a year into a Roth IRA, Collins said. Although the contribution is not tax deductible, money in a Roth can be withdrawn tax-free during retirement.

Collins also recommended Merkel look for ways to boost her income. Merkel agreed, saying she is already looking for assistant principal or principal jobs or a position at the district headquarters office.

Finally, Collins suggested Merkel protect herself if she ever decides to cohabit or tie the knot again.

Collins noted that avoiding marriage isn’t necessarily a solution. Unmarried couples who live together have particular financial and legal risks, especially if they buy property or other assets with joint funds, she said. Collins recommended Merkel consult “The Living Together Kit,” a book by Toni Lynne Ihara and Ralph Warner (Nolo Press, 1999), for details about how to set up an agreement with a partner.

Similarly, a properly written prenuptial agreement could help her protect her retirement funds and other assets should she ever marry again, Collins said. A fair prenuptial that protects her assets would also preclude her from sharing in her future husband’s retirement benefits and assets, so Merkel would need to weigh the pros and cons.

Merkel swears she won’t remarry, but she does plan to keep her finances as separate as possible in her future relationships.

“I feel like I’m getting back on my feet after three pretty long years,” Merkel said. “I want to protect what I’ve earned and provide for myself in retirement.”

Times staff writer Liz Pulliam can be reached at To be considered for a published Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053. You can also e-mail to, or you can save a step and print or download the questionnaire at


This Week’s Make-Over

* Investor: Jennifer Merkel, 39

* Occupation: School administrator

* Gross salary: $66,000

* Goals: A comfortable retirement

Current portfolio

* Assets: $593,000, including $525,000 home and $35,000 in California State Teachers’ Retirement System

* Obligations: $378,000, including $323,000 mortgage and $50,000 personal loan from parents

* Net worth: About $215,000, including $201,000 in home equity


* Getting restarted after divorce.


* Contribute as much as possible to 403(b) and Roth IRA, seek employment opportunities.


Meet the Planner

Victoria Collins is a certified financial planner and a partner in financial planning firm Keller, Collins, Hakopian & Leisure in Irvine. She was named one of the nation’s top 200 financial advisors by Worth magazine in 1996, 1997 and 1998.