Still Young, But Not So Care Free
Happy Valentine’s Day to all you happy couples! Valentine’s day holds a special meaning to our topic for this month - financial planning for the young couple. Valentine’s Day is the day we show our spouses how much we love them and one of the ways we do this is effective planning in the unlikely event we die early.
Turning to our topic for the month, just how do your financial planning needs change when you get married? Can’t you simply "make the two one" as the Bible says and go on with your life? You can almost do this if you are young and have no substantial assets. Unfortunately, though, that is not always the case.. While most couples start life off with little in the way of separately owned assets, there are those times when one or both spouses come to the marriage with substantial separately owned assets. In these cases, especially where children from a prior marriage are involved, planning may be necessary to 1) protect assets for the children of a prior marriage and 2) provide for the new spouse. This can involve more detailed planning techniques than we will discuss this month, so if you are looking at such a situation, please give us a call to see how you might protect everyone’s interests.
So how does your marriage change your financial planning needs? What will you need to do differently now that there are two of you at home instead of just one? Let’s take a look at the areas we discussed last month.
This is one area where financial planning needs probably don’t change regardless of your marital status. It can be one of the harder areas to get under control, though, since two people (husband and wife) will both have to agree on a debt management plan and stick to it. Aside from this little wrinkle, the tried and true methods of paying off higher rate loans and credit card balances apply equally to single and married persons. Again, make sure you stick to your payment plan and keep your credit record clean. This will become critical when you move toward home ownership and, increasingly important in auto insurance rates.
Let’s say you did a great job in saving for retirement. You contributed all you could to your 401(k) and your Roth IRA. Further, let’s say your new spouse did the same. This is great and there is really no need to change that strategy just because you get married.
Still, one of the first things you do when you get back from the honeymoon is head for the personnel department, IRA custodian or both. If you will remember, one of those forms you filled out when you opened your retirement accounts included the designation of a beneficiary. Since you weren’t married when you first completed the forms, your spouse certainly wouldn’t be the named primary beneficiary when you are married. Now, however, your spouse is the person who should be named as your beneficiary. You would be surprised how many people forget this step when their marital status changes.
You took our advice and either participated in your employer’s group health plan or went out and purchased your own coverage. Your spouse did the same and now you’re in a situation where you both have health coverage. Whose coverage do you keep?
The answer to this question depends on many factors, 1) cost, 2) plan benefits and 3) just how lucky you feel.
The first factor, cost, is an easy concept to grasp. How much do you pay and how much does your spouse pay? What will the cost be if one of you is added to the other’s policy?
It would be nice all plans had the same benefits and the second factor didn’t come into play, but it always does. If one of you has a much lower rate, look at the coverage very carefully. Perhaps drug coverage isn’t included in one plan or maternity is excluded from a plan. What are the copays for each plan and how do they figure into any maximum out of pocket expenses? Is coverage under one policy in an HMO while the other is under a PPO? Will you have to change doctors if you move from one plan to another? What are the deductibles?
The answers to these questions and many others concerning plan features can be more critical than the monthly premium cost. Another key question is the maximum lifetime benefit. It used to be that a $1 million maximum was all you would ever need, but $1 million can go quickly these days.
Does one of you have a higher deductible plan and another a lower deductible plan? Depending on cost, it may be helpful to keep both plans in place and this is where the luck factor comes in. Sometimes, when there are very high costs, having a secondary source of payment can reduce the cash coming out of your pocket.
Bottom line - don’t just assume you have to change insurance coverage. Look at your options before making changes, but by all means, do all you can to get or stay covered. Now if you have a major illness, not only will your financial life be on the line, but so will your spouses.
If you needed disability insurance when you were single, your will need it all the more if you are married. You will find that your lifestyle and its cost will greatly increase once you are married. That means if you are injured and unable to work, the higher costs will still be there and so will your need for income replacement. Make sure you both have as much disability insurance as you can get and can afford.
You just got married and have no major need for life insurance - right? Think again. While it’s true there may be little need to provide for children at this early stage or your new spouse, purchasing some insurance at a young age still makes sense. Locking in a lower rate on the chance that you may someday have little ones to provide for and making some provision to help your spouse through a period of bereavement can buy you ease of mind down the road when the insurance is necessary. As we said last month, though, this is probably not the most significant area of need you will have as a young couple starting a life together.
If you already have insurance, make sure you change the beneficiary designations. Assuming you married for love, it’s probably a safe bet that you would want your spouse to benefit from your life insurance proceeds instead of mom and dad.
If the first thing you do after the honeymoon is change the beneficiaries on your retirement accounts, the next place to go is to the lawyer to change your wills. Who served as executor of your estate when you were single? Is it likely that your spouse is going to want someone to serve as executor over what, in many instances, will be an estate that you and your spouse built up? This would also be a good time to make sure you give the right person your power of attorney in case you become incapacitated.
Our advice changes little from that of a month ago for single persons. Once you have met all your other financial needs, start your investment portfolio. You will still need to keep about six months living expenses in savings, and since there are now two of you, that amount will be higher than if you were single. From there, take a good look at whether you want to combine portfolios or keep your separate assets titled separately. If you chose to keep the separate assets separately, how will you handle any new investments? Choices, choices, choices!
If you have started out in life with a good financial plan, getting married, and the subsequent changes in your financial planning goals should serve to enhance your personal and financial life. Still, there are goals to be discussed and changes that need to be made to protect both you and your spouse. After the honeymoon, give us a call so we can help you in covering all the financial bases.
Have a happy February and please remember our troops in your hearts, thoughts and prayers.