Ryan Kalamaya (3s):
Hey everyone. I'm Ryan Kalamaya
Amy Goscha (6s):
And. I'm Amy Goscha.
Ryan Kalamaya (8s):
Welcome to the Divorce at Altitude A Podcast on Colorado. Family Law.
Amy Goscha (13s):
Divorce is not easy. It really sucks. Trust me I. know Besides. being an experienced divorce attorney, I'm also a Divorce client.
Ryan Kalamaya (20s):
Whether you are someone considering divorce or a fellow family law attorney, listen in for weekly tips and insight into topics related to Divorce co parenting and Separation in Colorado. Welcome. back to another episode of Divorce Altitude. This is Ryan Kalamaya. This week we're gonna be talking about Inflation and how Inflation Impacts Divorce Valuations and settlement ideas. And we're gonna be joined by a financial expert, Andy Baum. We've had Andy on the podcast before episode 29 on proving separate property in a Divorce. Andy is an so associate at Harper, Hofer and Associates.
Ryan Kalamaya (1m 5s):
He's a well-known valuation expert, and he previously gave a presentation on Inflation, what a mess to the Family Law Bar in Denver. Andy. Well, welcome to the show. Thank
Andy Baum (1m 18s):
You. Thank you for having me.
Ryan Kalamaya (1m 20s):
In the news, we just hear about Inflation. It's something that we didn't see too much or hear about all that much, but for those just to set the groundwork, I say tomato, you say Toma, you know tomato. What are we talking about when we mention Inflation? What, what is Inflation mean?
Andy Baum (1m 37s):
Let me just start with the, the definition of Inflation and defin. And. Inflation is defined as a rise in prices, which can be translated as a decline of purchasing power over time. So otherwise stated, a thousand dollars in your pocket in five years will not buy the same amount of goods and services that a thousand dollars in your pocket today will buy. It will actually buy less due to the impact of Inflation.
Ryan Kalamaya (2m 5s):
And we're gonna talk about how that can come into property Valuations, why it might matter for child support, how it could change separate property tracing. But you know, another thing that we're seeing too, Andy as a result of Inflation, what is the federal Reserve will they normally do in connection with Inflation?
Andy Baum (2m 27s):
Well, they have a target range as far as what they would like to see Inflation levels be at. And if it gets above that target range, their main tool for, for getting it back within that range is to impact interest rates. And so recently, over the past year or so, they have been steadily increasing interest rates to reduce the supply of money and therefore bring Inflation back down to its target range of about, I'd say, two to 3% of year over year. Inflation
Ryan Kalamaya (3m 3s):
Andy, one of the slides in your presentation is the recent Inflation in Colorado. And maybe if you could describe the chart or just exactly what has happened in Colorado for those that can't see this chart and they can follow along if they're watching online.
Andy Baum (3m 20s):
Sure. you know, I'll even, this chart begins in 2019, and I'll even give a little more background prior to that, which is over the past 20 or so years, Inflation has really been at a pretty moderate level. Generally it's been within the federal Reserve target range of two to 3% for a long time, past 20 plus years. And then Covid hit in early 2020. And initially Inflation actually went down almost to zero. But at the same time, what happened was the government was flooding the market with money. you know, everyone was getting their P P P funds, there was bailout money, there was a lot of money flooding the market.
Andy Baum (4m 2s):
And there was also, at the same time a big reduction in supply because of the impact of covid on global shipping. The supply of goods and services was going down at the same time as the money supply was going up. And so when those two things combined, the impact is you had a lot of money chasing less goods and services. So Inflation is the result. And it really started to pick back up in, let's say, you know, March of 2021 or in 2021, and then it kind of started to go crazy into 2021. I would say that it has peaked at about 9% year over year. Inflation in June of 2022 is when we reached our peak.
Andy Baum (4m 46s):
And, and what that means is that, you know, a basket of goods and services cost 9% more in June of 2022 than it did in June of 2021. And so since that time, it has started to moderate because of the fed's efforts to reduce the supply of money, increase interest rates, and, and now the latest data point shows that year over year Inflation is about 7% as of November, 2022. And I think the general consensus is that it will continue to decline, but nobody knows for sure how fast that will happen.
Ryan Kalamaya (5m 23s):
Yeah. So what does this mean for the long term? Like what are the long term Inflation expectations and why does that matter for people going through a Divorce?
Andy Baum (5m 36s):
So long term, and I'm I'm talking five to 10 years, the consensus between these various sources, the federal Reserve different economic forecast is that over the long term, again, five to 10 years Inflation year annual Inflation will average up between two and 3%, which is back in the, the fed's target range. But again, in the short term, the next 1, 2, 3 years, no one really knows for sure how quickly it will get back to that level.
Ryan Kalamaya (6m 6s):
And so you've had a, a slide and, and what does this mean for people going through Divorce? Like what if either party owns a house, what, what does this mean?
Andy Baum (6m 18s):
What I think you're touching on is that everybody, there's Inflation data that's put out by the Bureau of Labor Statistics and it, and, and it gives the increase in the cost of various goods and services. But really each case is specific in that everybody has their own personal Inflation rate. For example, if you own a house with a 30 year mortgage that's locked in while the Inflation rate on your housing costs is zero because your mortgage payment is locked in for the next 30 years. So as long as you have that mortgage payment, your Inflation rate is zero on your housing costs. And if, if you housing costs or let's say a third of your overall costs and otherwise inflation's at 8%, well then your personal, your personal Inflation rate would maybe be more so like 5%.
Andy Baum (7m 5s):
So that's, that's just something to consider is with each person, how much is their cost of, of living going up each year depending on what they spend their money on.
Ryan Kalamaya (7m 15s):
Well, one thing Andy that I'm sure you, you're seeing, but I am hearing a lot about is, as we talked about before, when Inflation increases to fight it, the Fed increases interest rates and what has happened, and just to put it in perspective, 18 months ago we were talking about mortgage rates that were historically low. Now 18 months later, we're talking about mortgage rates that are very historically high compared to what your historical kind of framework is. But at least in my memory, they're higher than they have ever been. And so what happens Andy is people Eric and Melanie, Wolf are hypothetical Divorce client, they have a joint mortgage.
Ryan Kalamaya (7m 58s):
And when Melanie gets the house and the Divorce, then she's gonna be expected to refinance her house, the house that she gets. And when we're talking about a double, sometimes triple the mortgage interest rate, then her out-of-pocket, her costs, it can result in her not being able to keep the house. And so people say, well, Ryan, I just refinanced a year ago, or, or 18 months ago or two years ago when they were really low, you're telling me that I have to refinance why? And you know, to put that into perspective, that is just one area where Inflation and basically the collateral of the interest rate result can really impact a, a Colorado Divorce
Andy Baum (8m 45s):
True. I mean, in that, in that case, she could be paying double the amount of interest that she was paying prior to the refinance.
Ryan Kalamaya (8m 52s):
Yeah. So what other things in terms terms of property, it's not, you know, it wasn't part of your presentation, but I'm curious, what is the impact of Inflation having with Business Valuations and how you are looking at future growth rates? When you kind of talk about the short term versus the long term interest rates, how is that a risk in Valuations of closely held businesses?
Andy Baum (9m 20s):
That's a good question. And, and there is an impact on the growth rate and then also the, the discount rate that we use, which is, which is the, the rate that we use to discount future cash flows back. But I will say that in most of the business Valuations that we do for Divorce, PURPOSES, we take the long view. We look And, we project cash flow streams actually into perpetuity in most cases. And so because we're doing that and taking the long view and because the long view, even now even in a period of long Inflation like we just looked at on that scale, the long view is that over the long term, Inflation will moderate back to the two to 3% range.
Andy Baum (10m 2s):
I would say that as far as business valuation, because it's taking the long view, there's not a huge impact with regards to Inflation.
Ryan Kalamaya (10m 11s):
Let's switch gears and talk about maintenance and as well as spousal support. But what is the impact of maintenance or alimony and inflation in Colorado?
Andy Baum (10m 25s):
So if alimony maintenance is not adjusted for Inflation, the impact is that because of Inflation, the spending power of the maintenance payments that a recipient receives every year is going to decrease and it's gonna decrease more and more each year. For example, my presentation has a, has a chart, and in this chart there's a hypothetical $1,000 payment each year. And Inflation is high right now, so we're talking about it. But even at historical levels, Inflation eats away at the spending power of future payments and should always be considered because let's say an Inflation rate of 4%, which is a little bit higher than the Fred's targeted range.
Andy Baum (11m 11s):
But if you had a payment of a thousand dollars, let's say, you know, you had a maintenance payment that was set five years ago and not adjusted well, that maintenance payment was set up so that you could buy a thousand dollars worth of goods and services at the time that maintenance began. And so five years down the road, you don't adjust the maintenance payment. It's the same amount you've been getting five years ago. And so you receive your thousand dollars maintenance payment, but since we're five years down the road and inflation's been running at 4%, well that thousand dollars that you're receiving now five years after the date that maintenance was set, only has the same power to buy 800 or or goods and services.
Andy Baum (11m 53s):
That $822 would've bought you five years ago. So that's some, that's a big decrement to your spending power just because of Inflation. And that's not at the six to 8% range of Inflation that we're seeing today. That's, that's at the, you know, the top of the desirable range of what the federal Reserve warrants.
Ryan Kalamaya (12m 12s):
This episode is brought to you by our law firm, Kalamaya, Goscha, Amy, And I describe our law firm as an innovative and ambitious trial team that pushes the boundaries to discover new frontiers in family law, personal injuries and criminal defense in Colorado. We currently have offices in Aspen, Glenwood Springs, Edwards, Denver, and Boulder. if you wanna find out more, visit our website, Kalamaya Law. Now back to the show, Annie, when I see this chart, and for those that can't see it, we'll have a link to the presentation in the, in the show notes. But I mean, just conceptually, if someone did $10,000 per month in spousal support, in spousal support, there's two kinds of spousal support.
Ryan Kalamaya (13m 3s):
There's modifiable and then there's contractual. And if it was set $10,000 per month for 10 years, at the time when Inflation was very low, no one was thinking about, well, inflation's gonna go through the roof, but now that $10,000 is easier for the payor, Eric Wolf if he's paying Melanie maintenance and it means that she's getting less. And I'm think back to a lot when people were, you know, making a ton of money, that bull market and the taxable aspects of maintenance, a lot of people locked in those long term maintenance.
Ryan Kalamaya (13m 45s):
And now I can tell you Divorce attorneys, we are really thinking about having $10,000 a month, that same scenario with a caveat that it's going to increase with C P I consumer price index, where it, it will increase over over time. I see that, I've seen that in premarital agreements. And the idea is that premarital agreements, you know, what someone agrees to 20 years ago or 30 years ago because the marriage could last a lot longer. So people really do kind of think about in Inflation a little bit differently, but it is not as common in Separation agreement. So certainly a topic of discussion amongst the Divorce professionals because now we're kind of top of mind thinking about how Inflation can matter for maintenance.
Andy Baum (14m 32s):
Yes, I agree. And and again, I mean I think it's, it's only fair that the spending power of a maintenance payment would remain the same. Yeah,
Ryan Kalamaya (14m 40s):
And same thing with child support. You And I, you And, I, were talking before getting online and recording this, but there's a child support commission that meets every five years and determining child support. It's by essentially a formula, unless it's for the upper, upper echelon. And then at that point then you're kind of in the same realm of, of maintenance where it, it could be just kind of indexed with Inflation, but Inflation has hit people differently. Where food is is has certainly increased. We've all, I mean I can tell you in Aspen a a topic, a gripe of of everyone, it's just how much it costs to go out the restaurants and just the food costs have increased dramatically, whereas other aspects in the economy, they haven't really mattered, but the food in child support is in part to kind of reimburse people for food.
Ryan Kalamaya (15m 31s):
But heating all of those things, it kinda has impacted us differently. And that is something that we're all still kind of sorting out and really thinking about what the impact of Inflation is. But anything Andy with property payments, you know, one thing you kind of often see is you value a business Preston and you will value a business and there will be a buyout where someone buys out the, the other in the equalization payment, the interest rate that goes with that equalization payment. Again, that's gonna be a reflection of risk and Inflation. So any thoughts on what people should be doing with Inflation with equalization payments?
Andy Baum (16m 13s):
Yeah, I mean as far as interest owed on an equalization payment, in order to protect your client against Inflation, you would at least want to have the interest rate the measure with Inflation and that that can be agreed upon or, or You can tie it to a certain index measure, like, like the consumer price index, which is put out by the Bureau of Labor Statistics. And, and You can even get regional specific information because they put out price information that is relating to the price index increase in the Denver metro area. So that is something that You can do. And then another component of that, so here we're talking about Inflation, but I also want to say that there, that there's often a component of interest for equalization payments that relate to, essentially if somebody doesn't receive their equalization payment up front, the pay is, is getting use of the money that theoretically belongs to the other person.
Andy Baum (17m 10s):
And because they don't have that money, they can't invest it and earn an additional return on that. So there's usually even two components to an equalization payment or the interest on the equalization payment, which is one Inflation, then two, you know, payment a return for the use of that money. Well
Ryan Kalamaya (17m 27s):
Kind of wrap things up. The final thing to kind of tie in our previous episode on tracing separate property, can you tell Listeners what Impacts inflation may have for separate property in a Colorado divorce?
Andy Baum (17m 43s):
Yeah, and so, you know, as we talked about in the, in the prior podcast, increases in the value of separate property are marital. And so I have not seen any kind of case law or statute that addresses the impact of Inflation on when kind of looking at what that increase is. The way that the statute is written in case law that I've seen is just the increase in value is, is a hundred percent marital. But one thing that really, you know, should be at least considered is, you know, what percentage of that increase in value is what I will call a real increase in value.
Andy Baum (18m 23s):
What percentage of that increase in value is over and above Inflation? Because, you know, we talked about offline is if if somebody had a a, you know, a gold Rolex over a long period of marriage, that gold Rolex probably increased in value. But the court would likely say, you know, the Rolex existed at the date of marriage and it's entirely separate property. But if that value was not in a Rolex but in a bank account, the bank account increased in value, the court would say that that increase in value is marital property because it can be measured easily.
Ryan Kalamaya (18m 55s):
Yeah, And I think for people to think about just during their Divorce, if they were getting divorced in 2021 and 2022 and they just sat and they had a million dollars in their bank account and their checking account, they lost money in real terms because those checking accounts are not paying any interest. Meanwhile, the Inflation has gone up, so they've actually gone backwards. But to your point, And, we talked about how this could impact different asset classes. So if someone, if Eric Wolf has a million dollars in separate property and that has increased 10% because it was in the us you know, stock market primarily, is it fair to say, well we should take out Inflation because, and the way that the law is written?
Ryan Kalamaya (19m 43s):
I agree with you and there is no case that I'm aware of that says, you know, under fourteen ten one thirteen it, it says increase in value. So do you just take that 10% or do you net out? Do you reduce Inflation? Because it is just the reality when we go back to that $10,000 in maintenance 10 years ago, that is worth less now than it was today. And so it, that is an interesting concept. I don't think any Colorado court has really taken into consideration. I think it's probably it falls within that economic circumstance, but it it's a really interesting topic or observation by you Andy that I think is worth, you know, certainly exploring and mentioning.
Andy Baum (20m 28s):
Yeah, it's, it's certainly a, a common sense argument that can be
Ryan Kalamaya (20m 32s):
Made. Yeah. And when we see these, the tracing separate property and the contributions and Inflation, And, I think when people really think about, and the kind of, I guess it brings some other topics that we've talked about is that I think people, when they get through their Divorce, they need to kind of be smart about what they do with their money and the topic of Inflation, not only can it have an impact on what happened during the marriage, for example, separate property, but as we discussed after a Divorce, so the increase in maintenance or what people do with their money, whether it invest in stocks or bonds or any one of those asset classes.
Ryan Kalamaya (21m 15s):
And because if you just sit there and, and you're ignorant as to what the impact of the money that you get, you could end up being far worse off than you really anticipated. But, you know, and Andy you, you are like neck deep in those issues cuz you breathe Divorce numbers and money all the time.
Andy Baum (21m 35s):
Correct. Yep. And I think kind of what you're talking about is they kinda refer to Inflation as just a silent killer, you know, like unless it eats away your money, but, but a lot of people just aren't aware of it and they should be.
Ryan Kalamaya (21m 47s):
Well I'm interested to see as we're recording this in December of 2022 to see what the impact is over the long term cuz you know, the market ha and, and certainly one issue consequence of this Inflation has been some really extreme volatility within the stock market and that has caused some other issues in terms of how do you value stock portfolio. Like when is it do you cut off? Because when the market hears about Inflation easing up, then all of a sudden the stock market goes crazy because people are thinking about, oh, the Fed is gonna reduce interest rates and what does that do for people in a Divorce?
Ryan Kalamaya (22m 30s):
The flip side of that is that Inflation, there's been some mixed studies on what the impact that has on Divorce because some people they might look at the increase in real estate and increase rent and increase in the cost of living and say, I can't afford to get a Divorce. And it does, you know, as a practical matter force people to stay together. And so there's been some studies like 1980s the last time we saw really prolonged Inflation at this level, Divorce rates were lower. And so, but what we'll see in the future is something certainly that will be interesting to observe. Any thoughts on that? Andy you
Andy Baum (23m 8s):
Touched on this, but Inflation Inflation expectations are baked into what an investor will pay for for a certain asset class. I mean, when we do a cost to capital buildup for a business or whatever, there's the first input is the risk free rate, which includes and is mostly Inflation expectations. And if investors, an investors expect higher Inflation, they're gonna expect it to be compensated for that. And the kind of the flip side is that, is that they're gonna pay less for an asset and it's gonna lower the price. So yeah, I mean it's because of Inflation stocks are worth less and, but again, it it, it is something that should work itself out over the long term.
Ryan Kalamaya (23m 49s):
Well we'll see. Maybe we'll have you come back on And, we can do a dissection and postmortem on where we expected things to go and where the Fed expected things to go and, and how things are out. But it's always great to talk to you Andy. Really appreciate the time. Happy holidays and thanks again for joining us on Divorce at Altitude.
Andy Baum (24m 11s):
Yeah, likewise. And I'm looking forward to hopefully yeah, coming back and see where things are at because if anybody says they know where inflation's gonna go, especially in the short term, I I would say, I don't know how, how confident they really can be.
Ryan Kalamaya (24m 22s):
Well I'll leave one tipper, I believe Warren Buffett, they asked him what one data point he would want to know off the future in terms of expecting returns on the stock market. And obviously people are aware Warren Buffett's one of the wealthiest kind most successful investors and he said that he would want to know the interest rate. And that's in part, directly related and correlated to Inflation. And so if we know the interest rate in the future, then we should have a handle on where things stand on Inflation. Yep.
Andy Baum (24m 56s):
It is a big component.
Ryan Kalamaya (24m 58s):
All right. See Andy.
Andy Baum (24m 59s):
All right, bye-bye.
Ryan Kalamaya (24m 60s):
Hey everyone, this is Ryan again. Thank you for joining us on Divorce at Altitude. if you found our tips, insight, or discussion helpful, please tell a friend about this podcast. For show notes, additional resources or links mentioned on today's episode, visit Divorce at Altitude dot com. Follow us on Apple Podcasts, Spotify, or wherever you listen in. Many of our Episodes are also posted on YouTube. You can also find Amy And Me at Kalamaya.law Or 970-315-2365. That's K A L A M A Y A.law
