Missed Opportunities for Married Couples Trying to Save
We work with a lot of couples to help them plan for their long term goals. In some cases, we work with couples who keep their financial lives separate. Often this is the case with newlyweds who have yet to combine accounts and are not quite comfortable sharing all of their financial details with their spouse yet. It can even be the case with couples in their 50s and 60s who have kept separate accounts for many years.
In any case, planning for your financial future together is essential. Not only because financial issues are one of the leading causes of fighting in relationships, but also because planning separately can lead to significant missed opportunities that can negatively impact your wealth.
Below we list some of the common missed opportunities when married couples fail to take a holistic view of their financial picture:
Best Use of Retirement Contributions
If both spouses are employed, it is important to evaluate the retirement plans available from each employer. One may have a more generous match or very high costs. If you are not able to maximize contributions to all accounts yet, then it may make sense to fund one plan to a higher extent than the other. Investment choices are also fairly limited in employer sponsored plans, so one plan may have a great foreign choice while the other has low cost index funds or a generous fixed account. Looking at the whole picture together can allow you to build a more balanced portfolio while taking advantage of efficiencies that can boost your long term net worth.
Double Roth IRAs
Roth IRAs are the gold standard of savings accounts. Contributions go in after tax, growth is tax free, and withdrawals are completely tax free in retirement. You can also always withdraw your contributions tax and penalty free. This makes them a great tool for college savings and as back up emergency funds. However, in order to be eligible to contribute your AGI has to be <$184-194k for Married Filing Joint couples. In many cases we find that increasing retirement contributions a few percentage points, taking advantage of an HSA, FSA, or deferred compensation plan will bring a couple into eligibility for this valuable savings tool.
In some cases, when one spouse earns less than the other they can feel like they are not “contributing to the household” as much when their retirement contributions go up since their take home pay goes down. However, increasing retirement contributions in order to make Roth IRA contributions will have a net positive effect on their net worth. This is a very powerful tool to improve your long term financial situation.
Access to a 457 Plan
In the same vein as retirement contributions, certain employers (state or local government or tax-exempt organizations) offer access to a 457 plan for retirement. These plans are unique in that contributions to 457 plans are not classified as salary deferrals by the IRS. Therefore, if you participate in a 403b or 401k plan and a 457 plan you can contribute $18k to the 401k or 403b AND $18k to the 457 for a total of $36k pre-tax retirement contributions in one year ($24k/$48k for those over age 50). This can lead to a huge reduction in taxes now and put your retirement plan into hyper drive.
The problem is, most state and government workers, besides doctors and lawyers, don’t make enough money to defer that much toward retirement. But, they might have a spouse who makes a higher income. This might allow the lower earning spouse to defer the majority of their salary toward retirement pre-tax while the other spouse’s income supports the day to day expenses. For super savers, this may also bring you into Roth IRA eligibility, a savings trifecta.
So far we have discussed retirement contributions that can decrease your taxable income. There are also tax benefits that come with being married like writing off one spouse’s business losses on the joint tax return and leaving assets tax free to your spouse at death.
We all know that life insurance is necessary for young couples raising a family, particularly on the primary wage earner. It may also be important to hold a policy on a spouse who stays home with young children, since a premature death could necessitate additional expenses for the surviving spouse. Later in life insurance can also be used to allow for a higher lifetime payout from a company pension. In most cases pensions are offered with multiple choices for survivor benefits. These all come at a cost of course and if the pensioner is relatively healthy, holding a life insurance policy for present value of the income stream may be a cheaper option.
Social Security Claiming Strategies
Last but certainly not least is Social Security. This is definitely a financial decision you want to make as a couple. About a third of people claim benefits at age 62, but in many cases this leaves a lot of money on the table, particularly if there is an age difference between spouses. If one spouse has a longer life expectancy than the other, it may make sense for the higher earning spouse to delaying claiming benefits until age 70. This would allow the surviving spouse to receive that higher benefit over the course of their lifetime.
Social Security is also an important consideration for divorced spouses. If you were married for more than 10 years and never remarried, you are still eligible for benefits based on your spouse’s earnings history. This may be more beneficial than receiving your own benefits. You are also eligible to receive your ex-spouse’s full benefit upon their death. This is a benefit you do not want to miss out on.
An Advisor's Guide to Helping Women Become Savvy Investors
Today, more women than ever are involved in managing their personal and household finances. In a recent study, nearly half of the women surveyed (44%) stated that they are solely responsible for their household financial decisions, compared to 35% of men1. But the study wasn’t all good news. While women may be taking the lead when it comes to their finances, they also reported that they are not confident in doing so. In fact, in every financial category included in the survey, men reported much greater confidence than women. Where was the biggest gap? You guessed it: investing.
For advisors, this presents a challenge and an opportunity. There is a 90% likelihood that a woman will be financially self-reliant at some point in her life due to divorce, becoming a widow, or choosing to marry later in life or not at all2. By taking steps to help your female clients become confident, savvy investors, you’ll not only be more effective at serving in the best interests of these women and their families, but you’ll also be able to build much stronger, more trusted relationships to help ensure each family’s assets remain in your care for decades to come.
Follow these five steps to help your female clients invest with greater confidence:
1. Urge every woman to put her financial needs first.
Women do have a weakness when it comes to planning for the future, but it has nothing to do with a lack of knowledge, skill, or smarts. Their primary weakness is a willingness to put others’ needs first. This is a huge mistake when it comes to planning for the future. Investing for retirement simply can’t wait until the kids are grown or aging parents no longer need care. In fact, based on average life expectancies, women should plan to accumulate enough funds to last at least 20 years after retirement. The following chart illustrates the power of compounding based on an 8% rate of return to help bring that point home:
This hypothetical example assumes an annual 8% rate of return and does not take into account income taxes or investment fees and expenses. This example is for illustrative purposes only and does not represent the performance of any specific investment. An investor’s actual return is not likely to be consistent from year to year, and there is no guarantee that a specific rate of return will be achieved.
2. Educate women about the power of investing.
Security about any topic is rooted in confidence and knowledge. Educating your female clients about investment basics can help drive more confident decisions and more positive long-term outcomes. From the basics of compounding to the nuts and bolts of researching options and understanding the pros and cons of different asset classes, make it your job to help every client understand what she is buying—and why.
3. Dive into the details of asset allocation.
Asset allocation is by far the largest determinant of a portfolio’s success—even more important than the individual securities selected and timing of an investment. This is critical information for your client to understand as she pursues her financial goals.
4. Discuss how her investment strategy needs to evolve over time.
Part of every client’s financial education should be to understand how financial needs and goals change with each stage of life stage. Because a shorter investment time horizon creates greater vulnerability to market volatility, she needs to understand the impact of shifting a portion of her investment portfolio to more income-oriented investments as she moves closer to retirement. This Life Stages Guide can help you paint a clear picture of how allocation strategies need to evolve to fit her changing needs.
5. Be sure she’s covering all the financial bases.
Smart investing is vital, but missteps in other areas of financial planning can thwart even the best investment plan. Offer every client a basic planning checklist that includes these three important steps:
- Focus on the big picture. Organize your important financial papers and schedule an annual review of your investment strategy with your advisor. Regularly monitor your net worth—including your assets (all investments and savings) and liabilities (mortgage, credit cards, and other debts) to be sure you’re always moving toward your end goal of a secure retirement.
- Pay down any outstanding debt. Debt reduces your net worth, threatens your financial security today, and reduces your ability to invest for the future. Do whatever you can to minimize debt, and build an emergency fund to help pay for any unexpected expenses.
- Make estate planning a priority. Once a year, review your will and your beneficiary designations for every account to be sure they continue to reflect your wishes. If you have children under 18, work with your advisor or estate planner to establish a trust and select a trustee to ensure your assets are managed for the benefit of your children.
As a trusted advisor, make it your mission to provide your female clients with the education and guidance they need to become savvy investors and make the smart, educated financial decisions. By doing so, you can help every woman you work with not only enhance her financial security, but also gain the confidence to take greater control of every aspect of her financial life.
Click here to learn more about IndexIQ.
 Survey conducted by Regions Financial Corp. in partnership with Vanderbilt University, 2015.
 The Simple Dollar, “Guide to Financial Independence for Women,” 2014.
Disclosure: The information and opinions herein are for general information use only. The opinions reflect those of the writers but not necessarily those of New York Life Investment Management LLC (NYLIM). NYLIM does not guarantee their accuracy or completeness, nor does New York Life Investment Management LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice and are not intended as an offer or solicitation with respect to the purchase or sale of any security or as personalized investment advice.
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