By Randy Neumann
Are you marrying soon? Have you recently married? As you begin your life together, it’s important for you to combine your finances and begin planning for your financial future. Here are some ideas you might want to consider.
Let’s begin with retirement planning. There’s a chance that decades from now, many of us who are currently saving and investing for the future might end up millionaires. Actually, we may all need to become millionaires to successfully retire.
According to Social Security Administration projections, the average 63-year-old in 2011 is expected to live until the age of 84. So, today’s typical retiree is looking at a retirement lasting approximately 20 years. Furthermore, some of these retirees (many more than in previous generations) may very well live past 100.
So, sit down and put a pen or pencil to your retirement savings plans: 401(k), 403 (b), 457, etc. Remember, when contributing to a qualified (one approved by the IRS) retirement plan, you receive three benefits. 1. You get an income tax deduction for your contribution. 2. You get a tax deferral until you make withdrawals. 3. You pay tax on withdrawals: However, in most cases, your tax rate will be lower than when you made the contributions.
Given ongoing advances in health care, how long might you live? Living to be 90 or 100 might become commonplace for members of Gen X and Gen Y. Factor in inflation’s effect on the cost of goods and services, and you can see a possible scenario where you might need, say, $100,000 or more a year for 30 years to have a comfortable retirement, during which you don’t outlive your assets.
This (strong) possibility means you may want to make savings for retirement now a high priority.
Given a typical couple, because one spouse might be more risk-averse than the other (sometimes dramatically), you need to agree on the investment approach you take. Often, a financial adviser can act as an arbiter to help you in setting your level of investment risk. The level of risk you accept will be tied to the financial outcomes you achieve.
The next topic is debt management. Many people go through life shouldering five-figure or even six-figure debts. When couples marry, the danger is that one spouse’s debt will be seen as “his debt” or “her debt.” Arguments often erupt because “your debt” is hurting “us.”
Debt management should be a priority for any newly married couple. There are good debts, such as a mortgage, and there are bad debts, such as credit cards and other channels.
It is important for new couples to live within their means. An established, mutually agreed-upon budget can be very helpful in this regard. Different people have different levels of thrift and a different perception of what a “bargain” looks like. This perception gap can result in some interesting financial moments in your life when your spouse picks up a “bargain” that you call an “extravagance.”
Insurance coverage is an important area when you consider what can happen in your life. You can become ill, disabled, you can die, your property can become damaged, you can be sued or you can find yourself in a long-term care facility that costs over $100,000 per year. To protect yourself against these risks, make sure you purchase adequate insurance.
Communicate well to avoid surprises. No matter how much of a “we” a couple becomes, there is always a need for some private space – some individual pursuits and “me time.” That’s great, but it’s probably not the best approach when it comes to your shared financial life.
When a spouse starts to hide a money-related matter or omits it from conversations, it may open the door to trouble. Open, frank conversations about money are the best way to avoid problems in your finances (as well as your relationship).
Build an emergency fund. Many couples – nice, once-affluent people – who were hit hard by the economic downturn found themselves living in their car or a motel. When things got rough, many had no emergency fund to sustain them and ended up homeless.
Consider building up a cash reserve (gradually, if necessary) that you can tap into should something go wrong. You won’t regret having it.
Lastly, if you plan to raise children, it’s never too late to start saving for college. You can save a little at a time, a little each month. You can open a Section 529 college savings plan using different investment vehicles. In addition to offering some significant tax advantages, gifts from family and friends can be added to the plan.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. Randy Neumann CFP® is a registered representative with securities and insurance offered through LPL Financial. Member FINRA/SIPC. He can be reached at 12 Route 17N, Suite 115, Paramus, 201-291-9000.