We will help you build a complete data gathering process, creative strategies for settlement and ultimately sound financial decisions so there are no unexpected consequences and the most favorable financial outcome is achieved.
The last time I posted commentary on the San Diego Real Estate Market and how it can and should effect your divorce financial planning I mentioned an estimated figure of 25% as an average discount from listing price to sales price as one of my major concerns. The next day I received an e-mail from Prudential California Realty including their recent economic analysis confirming my estimates. The table below details the average list versus sale price for all home sales closed in the $1,000,000 plus price range in San Diego County over the last two years. The figure confirms my suspicion that a 20 to 25% disconnect exists between sellers and buyers. All of the realtors I speak to say they are aware of this and suggest being aggressive on pricing. Universally they say the homes that are priced right sell quickly and often above the listing price.
So what about the time line for sales in our current market? Again thanks to Prudential we have some current inventory information. The current inventory can give you some idea of the time it might take to sell a home in the current environment. From $1,000,000 to $1,999,999 there is an 11 month inventory of homes currently listed for sale. That means that realtors would expect it to take 11 months for all current inventory to be sold. In the $2,000,000 to $2,999,999 price range there is currently 34 months of inventory.
It is a generally accepted belief in the real estate industry that a market with more than 12 months inventory is stagnant at best. Stagnant is not a good term in the real estate business. It means prices have to come down in order to equalize supply and demand. We have too much supply and very little demand. Knock 20% discount from a $2,500,000 listing price to an estimated $2,000,000 sale price and maybe the markets free up.
Give us a call if you are faced with making a decision about what to do with the family home now that you are divorcing. It may be the biggest financial decision you make during the divorce proceedings.
Justin A. Reckers can be reached at:
Telephone: 858-509-2329
If you are faced with making a decision to keep or sell your family residence during divorce, the first thing you must understand is how our real estate markets work. San Diego area Real Estate markets tend to run in cycles of 8 to 12 year durations top to top. See what I mean by “top to top” by looking at the chart below which gives you a general idea how cyclical markets work. A cycle starts on the left of the chart at a “top” or boom market and ends on the right side of the chart with another “top” or boom market. In general you want to avoid buying at a top or selling at a bottom.
Take a look at the next chart to see how San Diego’s real estate market has performed over the last twenty-five years. Our last bottom was around 1997. The last top was 2006. The small up tick in 2009 and 2010 is likely based largely upon the increase in demand caused by government stimulus in the first time home buyer credit and artificially low interest rates. The two variables made purchases cheaper on the lower end of the price point and did nothing for the higher end for coastal areas like La Jolla and Del Mar and their inland neighbor, Rancho Santa Fe. I do not believe these areas of San Diego have seen the bottom of prices as of the drafting of this report. Many coastal areas such as La Jolla and Del Mar are seeing an average of 25% discount from listing to selling price. This makes me think the owners and Realtors in these areas believe their homes are worth more than others are willing to pay for them. Until they adjust their expectations these areas will continue to be over-priced and resist making a bottom in prices. Interest rates can only go up from here making it more expensive for buyers to foot the monthly bill, creating another road-block to transactions and further complicating price movement.
There are far more variables, than we can discuss here, involved in determining where the values of real estate will go in the years to come. San Diego real estate is still a good long-term purchase if you plan on living in the property for a long period of time and think of it as a home meant to provide security and comfort rather than an investment meant to earn a return and coincidentally provide you a place to live.
Many divorcing couples are faced with a reality of our current economic circumstances. Their house is worth a lot less than they paid for it 5 years ago. For many that means they are under-water, meaning they now owe more on their mortgage than the property is worth.
Give us a call if you are faced with making a decision about what to do with the family home now that you are divorcing. It may be the biggest financial decision you make during the divorce proceedings.
Justin A. Reckers can be reached at:
Telephone: 858-509-2329
In an article from HuffPost, they offer great tips on how to choose a “Mediation Friendly” lawyer. But here are more tips on how to effectively find the right team to help you with your divorce.
The consulting attorney you hire will be the only source of advice regarding your rights and obligations under the law. You need this advice so do not choose the least expensive person you can find. They may even be asked to draft legal documents such as Marital Settlement Agreement or Qualified Domestic Relations Order. Remember, No matter what method you choose to divorce, it is a legal process and legal advice is necessary.
Divorce is the largest financial transaction that many people will experience and you will live with the results of your decisions for the rest of your life. Make sure they are made with all of the financial information at your fingertips and expert advice from someone experienced in the financial intricacies of divorce. Google Divorce Financial Planning and look for a professional with Certified Financial Planner and Certified Divorce Financial Analyst credentials.
A financial planner experienced in divorce financial planning will help you gather the necessary data, level the playing field in financial knowledge when one party has not been involved in the family management and even help you brainstorm settlement options to take back to mediation.
Wellspring Divorce Advisors helps individuals and couples address the financial aspects of divorce in a civilized, equitable, and efficient manner by providing expert divorce financial planning and advice.
Contact us to find out how we can help you through this process.
Social Security in the United States refers directly to a lesser known federal Old Age, Survivors and Disability Insurance program or OASDI. The program was originally rolled out in the 1930’s in an attempt to limit what were seen as dangers to the American way of life such as increased life expectancy, poverty, and fatherless children. So the Social Security Act, signed in 1935, created social insurance programs to provide benefits to retirees, the unemployed, and as well as a lump sum benefit to the family at death. Many amendments have been made since the original Social Security Act of 1935. Most importantly; Medicare was added in 1965. The Social Security Act of 1965 also recognized for the first time that divorce was becoming a common cause for the end of marriages and added divorcees to the beneficiary list.
The largest component of benefits is retirement income. Throughout a person’s working life the Social Security Administration keeps track of income and taxpayers fund the program via payroll taxes also known as FICA (Federal Insurance Contributions Act) taxes. The amount of the monthly benefit to which the worker is entitled depends upon the earnings record and upon the age at which the retiree chooses to begin receiving benefits. FICA taxes are 7.65% for employees and 15.3% for self employed individuals. The amount of taxes paid is not directly used to calculate an individual’s benefit. The rate is broken down into two parts: Social Security and Medicare. The portion is 6.2% and is paid on a maximum of $106,800 of income for 2009. The income maximum is also known as a wage base. The Medicare portion is 1.45% on all earnings. These rates are set by law and haven’t changed since 1990. The wage base for Social Security is indexed each year for inflation and Medicare has maintained an unlimited base since 1993.
Self employed person’s pay double the amount of tax because the employer is responsible for the other half of an employee’s liability. A self employed individual is both employer and employee. There are wages not subject to FICA taxes including some state and local government employees who participate in alternative programs such as CalSTRS and CalPERS. Each state and local government unit with a pension plan decides whether to elect Social Security and Medicare coverage. Civilian federal employees are covered by Medicare but usually not Social Security.
The earliest age at which reduced benefits are payable is 62. The age at which full retirement benefits are available is dependent upon the taxpayers age. An increase of regular retirement age was enacted to reduce the amount of benefits payable. For those currently over age 70 the normal age was 65. Anyone born after will fall somewhere on increasing scale which climbs incrementally to age 67 depending upon birth date. Anyone born after 1960 must reach age 67 for normal retirement benefits. Delaying receipt of benefits will increase a taxpayer’s benefit until age 70.
Benefits are paid from taxes collected from other tax-payers. This makes it a pay as you go system and will eventually be directly responsible for the downfall of the program. At least as we know it today. In 2009, nearly 51 million Americans will receive $650 billion in Social Security Benefits. Economists project that payroll taxes will no longer be sufficient to fund benefits somewhere in the next 10 to 15 years. Once we can’t cover the expense from cash flow, the program will begin drawing down the trust fund it has accumulated during times of surplus taxes. We can only speculate what happens when the trust fund runs out. This is the cause for concern often discussed in the news and other media. The fix for this problem is the subject of much political posturing including that witnessed in President Bush’s 2005 State of the Union address.
The first reported Social Security payment was to Ernest Ackerman, who retired only one day after Social Security began. Five cents were withheld from his pay during that period, and he received a lump-sum payout of seventeen cents from Social Security. This might give you an indication of how Social Security handles business.
A current spouse is eligible to receive survivor benefits equal to 100% of the deceased worker’s benefit if they have reached normal retirement age.
Divorced spouses are eligible for benefits equal to one half of the worker’s benefit if they were married for 10 years have not remarried and are at least 62 years old. This is called a derivative benefit. A spousal applicant must wait until the worker has reached retirement age, 62, in order to apply for benefits. The worker is not required to have applied for benefits in order for the ex-spouse to apply for spousal benefits. They are not entitled to increases for benefits taken after normal retirement age. If a worker has died and the ex-spouse has reached full retirement age they can receive 100% of the worker’s benefit as survivor benefits.
If an applicant is between age 62 and their normal retirement age; the application for benefits will be based on the applicant’s earnings record. If one half of an ex-spouse’s benefit is greater than the applicant’s benefit on their own record; the applicant can choose to take whichever is greater. If you wait until your normal retirement age and file for spousal benefits you can continue to accrue benefits and enhancements for delaying your own retirement up until your age 70.
An ex-spouse’s receipt of derivative benefits on the worker’s record does not reduce the worker’s benefits. It is even possible for more than one ex-spouse to collect on the worker’s derivative benefits. This could lead to as much as 500% of the original benefit being claimed by the five ex-spouses.
Windfall Elimination Provision and Government Pension Offset Provision
For those worker’s who are covered by a pension based on their own earnings not covered by Social Security a different method of computing benefits applies. The alternative method is called the Windfall Elimination Provision (WEP) and was created to close a loophole that enabled worker’s who earned benefits in covered and non-covered employment from being labeled a low-earning worker and receiving a disproportionately large Social Security benefit.
The formula is weighted in favor of low earners because such a person is more dependent on Social Security. If the WEP is applicable it reduces a worker’s Social Security benefit by 50% of the worker’s pension benefit up to a maximum of $380.50 in 2010.
If you earned a pension based on work where you did not pay Social Security taxes, your Social Security spousal or derivative benefits may be reduced. The Government Pension Offset Provision (GPO) was enacted to treat retired government employees who had not contributed to Social Security similarly to retirees who had. The GPO reduces derivative benefits by two-thirds of other government pensions received. This can reduce Social Security benefits to zero.
The truly important ramification of the WEP and GPO on Social Security retirement benefits comes into play during divorce proceedings. Federal Law makes Social Security benefits the separate property of the party that earned them.
They are not assignable or divisible in a family law court and not considered an asset of the community in California.
Government and other pensions, on the other hand, are considered community property in the state of California to the extent benefits were earned during marriage. Derivative benefits under the Social Security program for ex-spouses would seem, at first glance to remedy the problem. The non-worker spouse get’s half of the worker’s retirement benefit via derivative benefit payments. Getting to the true ramifications of the WEP and GPO during divorce proceedings requires sound financial planning.
Consider the following couple.
– Jim was a private employee covered by the Social Security system. He retired at age 66 with a monthly Social Security benefit of $2,014.
– Barbara has been employed as a teacher for 30 years covered by the California State Teacher’s Retirement System. She retired this year at age 65 with 30 years of service under CalSTRS and a monthly benefit of $5,520 without having paid a single penny into Social Security.
– Barbara’s CalSTRS benefits are considered community property in California having been earned entirely during marriage.
– Jim and Barbara are divorcing and her CalSTRS pension will be divided equally with each party receiving $2,760.
– Jim will continue to receive his $2,014 per month of Social Security.
– Barbara will be entitled to a derivative Social Security benefit equal to one half of Jim’s benefit, $1,007, or the benefit she has earned on her own record. Barbara has not earned a benefit on her own record so she will choose to receive the derivative benefit on Jim’s record.
– The Government Pension Offset will reduce Barbara’s Social Security benefits by two thirds of her $2,760 pension benefit, or $1,839.82. The GPO leaves Barbara with $0 from the Social Security derivative benefit.
– Barbara will receive a total of $2,760 from her CalSTRS Pension and $0 from Jim’s Social Security derivative benefit.
– Jim’s Social Security benefits will not be affected by the GPO or WEP.
– Jim will receive $2,760 from Barbara’s CalSTRS benefit and $2,014 from his Social Security retirement benefits for a total of $4,776.
What looks to the lay person to be an appropriately arranged method for completing an equal division of assets leads to a grossly in-equitable settlement that provides Jim with $4,776 per month and Barbara with $2,760 per month.
The California Federation of Teachers sponsored a rally on November 7th 2009 to urge Congress to pass SR 484 in the Senate and HR 235 in the House of Representatives to repeal the Government Pension Offset and Windfall Elimination Provision. This has been attempted numerous times before without success. Social Security is a monster of finances, public policy and entitlement. Making changes is not easy or quick.
Consulting with a qualified financial planner experienced in the nuances of divorce finances and retaining their services as a neutral expert or advisor will help divorcing individuals work with and around in-equities caused by the system.
