Financial Independence and Early Retirement
Ever since law school (and graduate school for my wife), when we graduated with $200,000 in debt and literally zero assets, I have been very interested in personal finance. I even had my own personal finance blog, www.brokeprofessionals.com, which I later sold. The blog outlined our attempts to maintain a frugal lifestyle and to pay off our debt. Two years ago we finally met that goal and became debt free. That day is almost up there with the birth of my children in terms of the happiest days of my life, because I finally felt free of all the pressure I had been carrying for years.
Although financial independence is not a new topic--the book Your Money or Your Life talked about this decades ago---it has recently caught on with the millennial generation as a buzzword. When you see discussions of small houses, for instance, you are seeing the impact of financial independence culture. I too have followed along, reading blogs like www.mrmoneymustache.com and earlyretirementextreme.com to learn the tips about how to save, how to invest, and how to minimize taxes. My wife and I even did a podcast together talking about personal finance and marriage as it's a subject dear to us.
What is the basic concept of financial independence? It's to save most of your money over a shorter period of time, to invest it well, to be frugal, and to ultimately retire years or decades earlier than the average person (or to have the freedom to do so if that is what you desire).
Financial Independence and Divorce
One of the things that seemed swept under the rug when I read the early retirement and financial independence blogs or books was the impact that a health issue could have on plans. Some of the statements I read consisted of "just eat healthy and workout to avoid health issues," but life is not always so simple.
Another issue that seemed to rarely be brought up is what about divorce? How might a divorce impact financial independence or early retirement? Many people in the community talk in the forums about "trouble getting their spouse onboard for frugal lifestyle," but there was little practical discussion that I saw about how a divorce could potentially derail financial independence or an early retirement. This was odd to me given that most people in these communities are married.
Meanwhile, in my divorce practice we continued to build a firm focused on practical solutions, expediting the divorce practice, keeping costs down, and problem-solving rather than creating expensive wars with no real winners. Most of our clients get it but there are still those that believe being overly aggressive is the best path all the time (when in reality it may only be the best path in certain circumstances). I began to feel like my high school english teacher did when he would lament our poor grammar ("the problem is I am teaching you too late in the game. You really need to learn grammar in elementary school)."
I wouldn't quite say this "shook" the financial independence world, but he is sort of the godfather of the movement for many of us. He wrote the following on the subject:
That was a brave blog post and I would guess not his favorite to write, but it is also the viewpoint of someone going through something personal. I agree with most of the sentiment above and his post "the economics of divorce" is one of the best discussions of this under-addressed topic. That said, it was a very personal post of a very personal experience. As I like to joke with my clients, I have been divorced hundreds of times (through my clients). I think the above may oversimplify the situation for many even if I do agree with most of it.
So, I thought I would write a bit about financial independence from my own viewpoint, that of a divorce lawyer.
Thought on Financial Independence from a Divorce Lawyer
The above post really highlights a best-case scenario where two people are logical and rational enough to put the emotion of divorce aside and also possess the savvy and intelligence to (presumably) understand the terms of their arrangement. However, it appears his post states neither party used a divorce lawyer at all. I don't believe I'm just fighting for my profession when I write that I believe that is dangerous for many people. There is a lot of middle ground between working something out yourself without an attorney and full on "war." Our firm's mission statement is "Dolphins, Not Sharks" because we also believe that going to war in a divorce is often a waste of time and money and leads to collateral damage for you and your children. We often suggest that clients attempt to work out an agreement with their spouse (or with a mediator) that we can then review thereafter. However, in many divorce cases there are wrinkles that a simple form will not be able to address:
* For instance, most people do not know that many pensions, such as a police pension, are not protected if the officer were to die prior to retirement age, so as a divorce lawyer I would know to seek life insurance to protect the division of the pension. I might charge a client a couple of thousands of dollars to draft such an agreement but it could save that client hundreds of thousands of dollars.
* I use my experience to advise what is fair or not fair in an agreement. It is ultimately up to the client to decide if they wish to proceed or not, but at least they understand their rights and responsibilities.
* I would know if certain discovery is necessary such as an examination of all investment accounts, the proper division of retirement accounts and how they are tax-affected, the tax treatment of alimony, and novel issues such as the value of business, royalties, and so on.
So, although I have certainly seen cases where the involvement of divorce lawyers makes things worse, the aim of our firm is to provide value, to give reasonable advice, and to help a bad situation go more smoothly. In some cases with serious personality issues it is hard to reign clients in (or perhaps our clients are great but the other side is not). We believe in first pursuing the path of least resistance and only scaling up from their if necessary. That said, saying you can sit down and work out something without lawyers may be penny wise and pound foolish. This is also true where there are power imbalances (which often exist in divorces) where one side may be hiding assets, or may be taking advantage of the other side. So, a divorce like the one described in his posting is great but I would suggest it is the zebra more than the horse. Even as a lawyer I am paying a lawyer to handle my real estate deal because I want to make sure everything is done correct and I trust an expert to know more than I do even though as a lawyer I could likely handle the transaction myself.
At any rate, here are some of my suggestions to limit the risk of divorce interfering with early retirement and financial independence:
Prenups (Prenuptial Agreements)
I understand that prenups come with some risks---such as the risk of someone telling you they won't marry you if you insist on one. But here's the thing a wise lawyer once told me about any type of contract: "if they won't bend on reasonable language then it means they are keeping the door open to screw you in the future." A prenup would be helpful to limit future alimony exposure (and today women are quickly becoming the standard breadwinners in families so this is a concern for everyone getting married), you can address family money and properties owned pre-marital but they are usually exempt anyway), and you can also waive interest in pensions, etc. Most importantly, they set forth a reasonable course of dealing that should allow for a simple divorce. Although no prenup is 100% guaranteed to be enforceable, they are a cheap form of insurance against the 50% divorce rate.
In New Jersey many different classes of property are exempt from equitable distribution in a divorce, these include:
*personal injury awards; and
In order for such money, property, or investments to retain exempt you need to make sure they are never commingled with your spouse. That means that if you receive inherited monies you should either keep them in an investment account in your sole name or accept that by commingling you will likely lose half of it in a divorce.
Understand that alimony is largely based upon the salary history or potential of the parties. In most households today both parties work and this is actually helpful in a divorce if you may be paying alimony. There is real risk to having a stay-at-home spouse as that is the classic high-alimony example. Obviously live your lives with intention and not in fear, but this is the reality so keep it in mind. If you both have equal income or income potential then alimony will likely not be an issue. If on the other hand you make a quarter million a year and your spouse does not work outside the house then you may have a large alimony issue. I have seen some people waive alimony they are entitled to, but it is rare (and usually against my advice as a lawyer).
Whether you ultimately get divorced or stay married for fifty years, be mindful of your taxes in your personal finances. In a divorce it is important to make sure you are trading after-tax dollars for after-tax dollars (or otherwise getting properly compensated) and there are a ton of tricks you can use to limit your tax payments. A great personal finance blog for minimizing taxes is the Mad Fientist.
Be Reasonable and Strategic
As Mr. Money Mustache's blog post pointed out - you can preserve your future (and that of your children) if you can focus on being reasonable and not "going to war." I often tell clients "you can pay for your kids' college or you can pay for mine." I also counsel clients to treat divorce as a business decision and to view the process as unemotionally as possible (deal with the emotions elsewhere such as through counseling, exercise, meditation, etc.), the way an adjuster for a big insurance company or a government entity would (I know how they are because early in my career I used to represent them).
Don't let anyone use the emotions of a divorce to cause you to make bad financial decisions. That includes your choice of lawyer. You may be splitting one half of everything (more or less) and this may feel like a huge setback in your financial independence, but if you handle things correctly it will be a couple of year setback rather than a decades set-back. Ultimately, the choice is all yours.
If you have any questions or wish to reach our firm, call 908-237-3096. You can also use our website to self-schedule a consult. You can also click here to sign up for a no cost digital download of my book: Happily EVEN After: the Guide to Divorce in New Jersey.
All the best in your search for financial independence and/or early retirement. I hope the above advice is helpful to those of you facing this type of an issue in your journey.