Q: I’m engaged, and I’m doing some thinking about finances. Can you shed any light on this?
Certainly. Amid an engagement, it’s easy for couples to overlook key financial points that can affect their financial security and their relationship. As couples plan their wedding, it’s a good idea to do some foundational financial planning, as well. For older people entering their second or third marriages, this planning is perhaps more important because they are closer to retirement and probably have more assets. By addressing key issues before wedding bells chime, couples can prevent damage to their finances and relationships.
All too often, the following eight key issues are overlooked:
1. Failing to discuss finances.
Couples who don’t have this talk might soon find themselves fighting over spending habits or learn way too late about their partner’s poor credit. A discussion about money can pave the way for cooperative budgeting and reining in unnecessary spending. After you’re married, it’s best to refresh this conversation from time to time to make sure you keep things current.
2. Having one person run financial matters.
This is a recipe for trouble. It’s best for partners to make major financial decisions jointly and for both to play a role in maintaining accounts and paying bills. This way, there are no lingering assumptions that might explode down the road and no one feels burdened by having to handle financial matters on his or her own. Also, if one partner dies, the other is better able to handle financial matters alone.
3. Failing to treat individual accounts as one portfolio.
Married couples who manage their portfolios in isolation might be overinvested in some types of investments because of duplication. It’s better to manage these portfolios as part of one household after establishing a solid, long-term financial plan together soon after marrying or during the engagement. By diversifying investments across asset classes instead of being too heavily invested in one area, couples can lessen their risk, potentially lower their taxes and increase the probability of good long-term investment returns. This often means the coordination of two 401(k) plans, individual accounts and possibly two IRAs.
4. Putting too much emphasis on college savings and not enough on retirement.
Various loans and grants are available to college students, who have their whole lives to repay them. But there’s no such thing as a loan or grant for retirement. If you have enough assets for college funding and retirement, fine and dandy. If you don’t, it’s best to focus on retirement goals first.
5. Claiming Social Security benefits too soon.
You might be eligible to claim benefits at age 62, but the longer you wait, up until age 70, the greater your lifetime benefits will be. All too often, people automatically claim too early, forgoing substantial lifetime income. Exactly when you should claim varies and depends on numerous variables, including your health and life expectancy. This is something that should be discussed and coordinated between partners.
Spouses should consider formulating a strategy for when each claims benefits. By coordinating this timing, they can take advantage of not just benefits from their own accounts but from spousal and survivor benefits from their spouse’s account, potentially increasing total income. Because this can be one of the most challenging and important financial decisions you will ever make, always seek professional guidance from a knowledgeable, trusted adviser.
6. Failing to have enough disability insurance – or any.
Having disability insurance to protect your human capital – your ability to earn a paycheck – from accident or illness is critical for protecting your family’s financial foundation. This loss of income can wreak havoc now and be the main reason that you don’t achieve financial security. You might have a policy at work, but often these are short-term only. If so, consider supplementing it with a long-term individual plan.
7. Overlooking the potential cost of long-term care.
Because Medicare provides minimal benefits, the high cost of long-term care can drain or even wipe out retirement nest eggs. So it’s important to consider getting long-term care insurance.
8. Do you have or need a prenup?
Discuss the pros and cons of a prenuptial agreement and whether it’s applicable. Although there are many other financial issues you should carefully consider, by attending to these few, you can at least decrease the chances that your marriage will be plagued by financial problems. Remember the all-important adage: “Failing to plan is planning to fail.”
