Divorce and Asset Burn: Using Retirement Planning Techniques to Model Long-Term Outcomes of Divorce

Abstract

Financial professionals involved in divorce proceedings, whether for a client or an attorney, often use software to project the ability of a dependent spouse to earn income off of her separate estate. These projections have historically relied on static inputs and use a Monte Carlo simulation to illustrate the paths a portfolio might take. Within this study, the effects on dynamic income and expense changes on outcomes were examined. A comparison was made between the traditional Monte Carlo methods and Markov Chain Monte Carlo (MCMC) methods. Results using MCMC methods more closely approximated investment return distribution, and illustrated investable assets were the primary driver of long-term success, and not items such as spousal or child support. Practical implications for financial professionals, family law attorneys, judges, and clients are discussed as well as opportunities for future research.