The long-term impacts of the COVID-19 pandemic are numerous and far-reaching. It will likely take time to fully comprehend how much everyday life has changed since March 2020. From doorstep grocery delivery to virtual meetings, there are positive and negative aspects to which individuals are still adjusting. After living in close quarters through quarantine, it may come as no surprise that many marital partners are considering divorce. Dissolving a marriage is already a period of disruption for individuals and this process has changed post COVID, bringing additional and intensified emotional and financial challenges.
Contrary to the widespread assumption that divorce rates had increased during the pandemic, overall divorce rates actually declined during 2020. On a short-term basis, individuals may not have been able to afford a divorce as incomes had been impaired by the economic impacts of the pandemic. As the economy recovers and incomes become more secure, we anticipate a surge in pent-up demand for divorce proceedings. A survey of prominent family lawyers conducted in 2021 by the American Academy of Matrimonial Lawyers shows 63% of respondents reported seeing an increase in the number of cases or clients.
How often divorce takes place in the U.S.
As many businesses began to unplug as the pandemic surged in 2020, courts also canceled all sessions for a period, reopening only in a virtual setting in some locations later in the year. Court closures led to a backlog of cases that will take an extended period to work through as other types of cases (including criminal cases) take priority in booking the courts. The Connecticut courts, for example, reported a 50% increase in pre-pandemic case levels in January 2021. Despite the heroic efforts of family lawyers to drive forward cases, whether in person or virtually, the time it takes from filing the initial paperwork to final settlement has significantly increased. Virtual proceedings and extended timeframes have increased the stress and anxiety surrounding the already emotional divorce process—leading to even more acrimonious disputes.
Over time, the backlog of cases will likely clear, which may reduce the length of time to complete a divorce. However, there are many factors about getting divorced that have changed irrevocably. In order to be prepared to go through a divorce and to be well-positioned upon completion, it is now more important than ever for individuals contemplating or going through a divorce to consider its potential consequences for expenses and lifestyle, set realistic expectations for future market returns, and develop a thoughtful long-term financial roadmap.
Adjusting financial considerations in looking toward a new future
As individuals prepare to turn the page and start a new chapter, it’s important that they have all the information necessary to make decisions that will have lasting effects on their lives for years to come. From a financial perspective, a detailed investment plan is essential to determine the impact of a proposed settlement on their lifestyle. The analysis can result in increased confidence in cash flow sustainability and financial independence or provide the data necessary to support a change to the terms of an offer.
In order for the analysis to be as representative as possible, the inputs of cash flow expectations and tax considerations require careful consideration. During the pandemic, spending was an anomaly for many, as personal consumption was reduced to online shopping while spending on services like travel was nonexistent. As consumer demand for products and services increased in 2021, prices rose at a faster rate than consumers had become accustomed to prior to the pandemic. In looking to the future, lifestyle expenses must be developed with higher prices and changing spending habits in mind.
With the significant increase in spending to support the economy during the pandemic, expectations are high for an increase in income tax rates. At the same time, the strong returns for equity markets over the past several years likely increased the amount of realized gains in selling assets to cover lifestyle expenses. To help ensure the sustainability of wealth, the financial forecast should consider higher tax rates and higher associated tax payments due to embedded gains.
It is important to consider future cash flow needs and tax consequences versus looking in the rearview mirror and relying on historical figures. These are two critical components in analyzing a proposed settlement. Another input is the projected growth rate of assets, which also bears consideration given the economic impacts of the pandemic.
Adjusting market expectations in looking toward a new future
The historic run in the U.S. stock market post the financial crisis lasted more than a decade and provided investors with attractive returns of 14% on the S&P 500 index on average over the last 10 years, as of December 31, 2020. The bull market finally concluded in March 2020 as the pandemic began to emerge in full force—leading to a sharp increase in volatility, forcing investors to run for the hills over the fear of a global health crisis and the potential economic damage that would result. In fact, markets saw the fastest decline of greater than 30% on record, as it took only 22 trading days for the S&P 500 to achieve that feat. With equal speed, the market provided a prolific recovery that few could have envisioned. While investors certainly enjoyed above-average returns over the past decade, consensus estimates are for lower equity returns due in part to the long-lasting ripple effects that will far outlive the virus itself.
One of the results of the pandemic is the tab Americans are now stuck paying as the federal debt has surpassed $28 trillion. While fiscal stimulus was widely viewed as a necessity to help keep afloat small businesses and individuals directly impacted by the economic shutdown, it came at quite a hefty cost. This high and increasing debt load for the country is a perilous path as high rates of debt to economic output can lead to lower future economic growth.1
As a result of the high debt level, it is almost certain that tax rates will rise for both individuals and corporations. An increase in personal taxes could have a negative impact on consumer spending, which constitutes nearly 70% of gross domestic product (GDP). At the same time, an increase in corporate tax rates would reduce potential earnings, leading to a double whammy of potential for reduced revenues and earnings hitting stock valuations. The Federal Reserve stepped in during the pandemic to hold both short- and long-term rates near historic lows. Should inflation continue to rise with the economic recovery, the U.S. could see short-term interest rate hikes in late 2022 or early 2023, which could provide additional headwinds for corporate earnings as borrowing costs increase.
Looking ahead, it is essential for attorneys and their clients to understand the economic landscape in order to set realistic expectations for future asset growth versus relying on historical returns. It will be critical for all investors, but particularly those who are moving onto the next chapter of their lives, to work with a team that can provide customized, holistic advice to help best position assets for sustainable growth.
Adjusting wealth positioning in looking toward a new future
Even though the COVID-19 pandemic is not yet fully behind us, it is evident that its lasting impact will stretch far beyond its devastating health toll. Artificial spending levels, a more muted market outlook, and a strong likelihood of rising interest rates and taxes are just some of the factors that need to be considered.
As the nation continues to progress toward a semblance of normalcy and courts work through the backlog of cases, the need to reassess potential settlements and financial planning is more critical than ever. Waiting until a divorce is finalized and the settlement is determined is too late. Collaborating with a team of advisors who have deep wealth management expertise can provide support for attorneys and their clients as they think through complex financial and estate planning. Having a detailed analysis incorporating forward-looking data will provide comfort that individuals are securing an optimal settlement and are prepared for long-term financial success.
1Carmen M. Reinhart and Kenneth S. Rogoff, “Growth in a Time of Debt,” American Economic Review: Papers & Proceedings 100 (May 2010): 573–578 http://www.aeaweb.org/articles.php?doi=10.1257/aer.100.2.573
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