To consolidate or not: that is the question.
Some couples elect to consolidate their personal finances, while others largely keep their financial lives separate. What choice might suit your household?
The first question is: how do you and your partner view money matters? If you feel it will be best to handle your bills and plan for your goals as a team, then combining your finances may naturally follow.
A team approach has its merits. A joint checking account is one potential first step: a decision representing a commitment to a unified financial life. When you go “all in” on this team approach, most of your incomes go into this joint account, and the money within the account pays all (or nearly all) of your shared or individual bills. This is a simple and clear approach to adopt, especially if your salaries are similar.
You need not merge your finances entirely. That individual checking or savings account you have had all these years? You can retain it – you will want to, for there are some things you will want to spend money on that your spouse or partner will not. Sustaining these accounts is relatively easy: month after month, a set amount can be transferred from the joint account to the older, individual accounts.
A financial plan may focus the two of you on the goal of building wealth. Investment and retirement plan accounts are individual by design, but a plan can serve as a framework to unite your individual efforts.
You may want separate financial accounts. Some couples want to pay household bills 50/50 per partner or spouse, and some partners and spouses agree to pay bills in proportion to their individual earnings. That can also work.
This may have to change over time. Eventually, one spouse or partner may begin to earn much more than the other. Or, maybe only one spouse or partner works for a while. In such circumstances, splitting expenses pro rata may feel unfair to one party. It may also impact decision making – one spouse or partner might think they have more “clout” in a financial decision than the other.
Even if you staunchly maintain separate finances throughout your relationship, you may still want to have some type of joint account to address basic monthly household costs.
What else might you consider doing financially? Well, one good move might be to consult and retain a qualified financial professional to provide insight and guidance as you invest and save toward your goals.
Think about how your tax situation might change if you marry. Some people marry and correspondingly change their withholding designation from single to married on their W-4 form. In return, they are shocked to find their income taxes are much more than they ever expected – or they discover they have an enormous refund coming their way. Adjusting your withholding earlier in a calendar year makes more of a difference than if you do so later.1
If marriage means a name change, be sure to update bank account, investment account, Social Security account, and insurance policy data with time to spare. Marrying couples will probably want to redo beneficiary forms on accounts and policies and make various accounts joint tenants with right of survivorship (JTWROS) accounts or Totten trusts (also known as payable-on-death accounts). A JTWROS or POD account allows the assets involved to pass to a surviving spouse without probate.2,3
Take a look at the auto and health insurance coverage each of you have. You might notice some overlap, and you may want to address that.
The Knot, the wedding planning website, says that the number one priority for 55% of marrying couples is uniting personal finances. Agreeing how to handle your household finances can be a goal whether you marry or not.4
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - turbotax.intuit.com/tax-tips/tax-refund/top-5-reasons-to-adjust-your-w-4-withholding/L8Gqrgm0V [5/31/18]
2 - legalzoom.com/knowledge/last-will/topic/totten-trust [5/31/18]
3 - legalzoom.com/knowledge/last-will/topic/joint-tenancy [5/31/18]
4 - forbes.com/sites/investor/2018/05/08/the-most-important-conversation-newlyweds-need-to-have/ [5/8/18]
This vital investment account question should be answered sooner rather than later.
Investment firms have a new client service requirement. They must now ask you if you want to provide the name and information of a trusted contact.1
You do not have to supply this information, but it is certainly welcomed. The request is being made, with your best interest in mind, to lower the risk that someone crooked might someday make investment decisions on your behalf.1
Financial scams rob U.S. seniors of more than $36 billion per year. As a CNBC article notes, 27% of these frauds represent abuse or exploitation committed by third parties; 23% are wrongdoings committed by family members or trustees.1
The trusted contact request is a response to this reality. The Financial Industry Regulatory Authority (FINRA) now demands that investment firms “make reasonable efforts” to acquire the name and contact info of a “trusted person,” who they can get in touch with if they feel fraud or financial exploitation is occurring or if they suspect the investor is suffering notable cognitive decline.2
Investment firms may now put a hold on disbursements of cash or securities from accounts if they suspect the withdrawals or transactions amount to financial exploitation. In such circumstances, they are asked to get in touch with the investor, the trusted contact, and adult protective services agencies or law enforcement agencies if necessary.2
Who should your trusted contact be? At first thought, the answer seems obvious: the person you trust the most. Yes, that individual is probably the best choice – but keep some factors in mind.
Ideally, your trusted contact is financially savvy, or at least financially literate. You may trust your spouse, your sibling, or one of your children more than you trust anyone else; how much does that person know about investing and financial matters?
The trusted contact should behave ethically and respect your privacy. This person could be given confidential information about your investments. Is there any chance that, in receipt of such information, they might behave in an unprincipled way?
Your family members should know who the trusted contact is. That way, any family member who might be tempted to take financial advantage of you knows another family member is looking out for you, which may be an effective deterrent to elder financial abuse. The trusted contact can optionally be an attorney, a financial advisor, or a CPA.1
Your trusted contact is your ally. If you are being exploited financially, or seem at risk of such exploitation, that person will be alerted and called to action.
An old saying states that money never builds character, it only reveals it. The character and morality of your trusted contact should not waver upon assuming this responsibility. If given sensitive information about your brokerage accounts, that person should not sense an opportunity.
Now is the perfect time to name your trusted contact. You want to make this decision while you are still of sound body and mind. Choose your contact wisely.
1 - cnbc.com/2018/05/15/advisors-are-asking-their-clients-for-a-trusted-contact-choose-wisely.html [5/15/18]
2 - finra.org/newsroom/2018/new-finra-rules-take-effect-protect-seniors-financial-exploitation [2/5/18]
Why striving to stay in the workforce a little longer may make financial sense.
The median retirement age for an American woman is 62. The Federal Reserve says so in its most recent Survey of Household Economics and Decisionmaking (2017). Sixty-two, of course, is the age when seniors first become eligible for Social Security retirement benefits. This factoid seems to convey a message: a fair amount of American women are retiring and claiming Social Security as soon as they can.1
What if more women worked into their mid-sixties? Could that benefit them, financially? While health issues and caregiving demands sometimes force women to retire early, it appears many women are willing to stay on the job longer. Fifty-three percent of the women surveyed in a new Transamerica Center for Retirement Studies poll on retirement said that they planned to work past age 65.2
Staying in the workforce longer may improve a woman’s retirement prospects. If that seems paradoxical, consider the following positives that could result from working past 65.
More years at work leaves fewer years of retirement to fund. Many women are worried about whether they have saved enough for the future. Two or three more years of income from work means two or three years of not having to draw down retirement savings.
Retirement accounts have additional time to grow and compound. Tax-deferred compounding is one of the greatest components of wealth building. The longer a tax-deferred retirement account has existed, the more compounding counts.
Suppose a woman directs $500 a month into such a tax-favored account for decades, with the investments returning 7% a year. For simplicity’s sake, we will say that she starts with an initial contribution of $1,000 at age 25. Thirty-seven years later, she is 62 years old, and that retirement account contains $974,278.3
If she lets it grow and compound for just one more year, she is looking at $1,048,445. Two more years? $1,127,837. If she retires at age 65 after 40 years of contributions and compounded annual growth, the account will contain $1,212,785. By waiting just three years longer, she leaves work with a retirement account that is 24.4% larger than it was when she was 62.3
A longer career also offers a chance to improve Social Security benefit calculations. Social Security figures retirement benefits according to a formula. The prime factor in that formula is a worker’s average indexed monthly earnings, or AIME. AIME is calculated based on that worker’s 35 highest-earning years. But what if a woman stays in the workforce for less than 35 years?4
Some women interrupt their careers to raise children or care for family members or relatives. This is certainly work, but it does not factor into the AIME calculation. If a woman’s work record shows fewer than 35 years of taxable income, years without taxable income are counted as zeros. So, if a woman has only earned taxable income in 29 years of her life, six zero-income years are included in the AIME calculation, thereby dragging down the AIME. By staying at the office longer, a woman can replace one or more of those zeros with one or more years of taxable income.4
In addition, waiting to claim Social Security benefits after age 62 also results in larger monthly Social Security payments. A woman’s monthly Social Security benefit will grow by approximately 8% for each year she delays filing for her own retirement benefits. This applies until age 70.4
Working longer might help a woman address major retirement concerns. It is an option worth considering, and its potential financial benefits are worth exploring.
1 - dqydj.com/average-retirement-age-in-the-united-states/ [6/11/18]
2 - thestreet.com/retirement/18-facts-about-womens-retirement-14558073 [4/17/18]
3 - investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator [6/14/18]
4 - fool.com/retirement/social-securitys-aime-what-is-it.aspx [6/9/18]
Why a middle-class woman may end up less ready to retire than a middle-class man.
What is the retirement outlook for the average fifty-something working woman? As a generalization, less sunny than that of a man in her age group.
Most middle-class retirees get their income from three sources. An influential 2016 National Institute on Retirement Security study called them the “three-legged stool” of retirement. Social Security provides some of that income, retirement account distributions some more, and pensions complement those two sources for a fortunate few.1
For many retirees today, that “three-legged stool” may appear broken or wobbly. Pension income may be non-existent, and retirement accounts too small to provide sufficient financial support. The problem is even more pronounced for women because of a few factors.1
When it comes to median earnings per gender, women earn 80% of what men make. The gender pay gap actually varies depending on career choice, educational level, work experience, and job tenure, but it tends to be greater among older workers.2
At the median salary level, this gap costs women about $419,000 over a 40-year career. Earnings aside, there is also the reality that women often spend fewer years in the workplace than men. They may leave work to raise children or care for spouses or relatives. This means fewer years of contributions to tax-favored retirement accounts and fewer years of employment by which to determine Social Security income. In fact, the most recent snapshot (2015) shows an average yearly Social Security benefit of $18,000 for men and $14,184 for women. An average female Social Security recipient receives 79% of what the average male Social Security recipient gets.2,3
How may you plan to overcome this retirement gender gap? The clear answers are to invest and save more, earlier in life, to make the catch-up contributions to retirement accounts starting at age 50, to negotiate the pay you truly deserve at work all your career, and even to work longer.
There are no easy answers here. They all require initiative and dedication. Combine some or all of them with insight from a financial professional, and you may find yourself closing the retirement gender gap.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 - forbes.com/sites/karastiles/2017/11/01/heres-how-the-gender-gap-applies-to-retirement/ [11/1/17]
2 - money.cnn.com/2017/04/04/pf/equal-pay-day-gender-pay-gap/index.html [4/4/17]
3 - forbes.com/sites/ebauer/2018/03/16/how-should-we-make-social-security-fairer-for-moms/ [3/16/18]
Even with interest rates rising, you may want to explore the possibilities.
In the first quarter of 2018, the refinance share of home loan applications in the U.S. fell to 40%, the lowest in ten years. Higher mortgage rates had reduced demand for refis.1
Still, the refi is not exactly dead. If you have good credit, you may be considering refinancing yourself, for one or more reasons. Perhaps you want to shorten the term of your home loan. Maybe you have an adjustable-rate mortgage now and want to refi into a fixed rate. Or, maybe you want to tap into home equity or consolidate debt. Whatever your reason(s), you must weigh two questions. One, how long do you want to stay in your home? Two, how much money will you really save?
Refinances break down into three types: rate-and-term, cash-out, and cash-in. Rate-and-term refis simply adjust the term and/or the interest rate of your existing loan. Even though interest rates are rising now, they still make up the bulk of refinances. This kind of refi could permit you to walk away from closing with as much as $2,000 in cash. The no-cash-out variety adds closing costs to the loan balance, relieving you from having to pay those costs out of pocket.2
A cash-out refi gives you an opportunity to tap home equity and pay off your existing mortgage. In a cash-out mortgage, the loan balance on the refinance is at least 5% more than the balance on the original loan. As you just owe the balance of your original loan to the lender, the overage is either paid out as cash at closing or routed to your creditors to help you whittle down other debts.2
A cash-in refi is the inverse of a cash-out refi. You bring cash to the closing to lower the outstanding principal of the loan, pursuant to a shorter loan term or a lower interest rate available at lower loan-to-values (LTVs). You may be able to cancel mortgage insurance premium payments as part of the move (i.e., by reducing a conventional mortgage to 80% LTV or lower).2
How much will a refi cost? In ballpark terms, the answer is often $2,000-$5,000. In percentage terms, think 3-5% of the loan amount.3,4
The price of a refi may be notably cheaper in one state than another, thanks to variations in closing costs. Of course, certain closing costs may be negotiable, like app and processing fees. Sometimes you can save on title searches, title insurance, and inspections by turning to a third party for those services. If your last appraisal was conducted recently, you might be able to negotiate your way out of a new one.3
Sometimes you can refinance without an appraisal. The Federal Housing Administration (FHA) and Veterans Administration (VA) offer streamlined refinancing programs to homeowners with existing FHA or VA-backed home loans. The underwriting process is less demanding than it would be otherwise. Besides usually waiving the appraisal, these programs also commonly waive credit score and income verifications.2
In some situations, refinancing may not be “the answer.” If you are stretching the term of your loan out with a refi, you will carry mortgage debt for years longer than you originally planned, complete with thousands more paid out in interest. If you are using home equity to fund a remodel or upgrades, your home’s value may not rise as much as you anticipate from the work. Then there are the little curveballs life throws at us, such as potential job changes and relocations. If you sense you might have to move before you can recapture the closing costs of the refi, is it even worth the trouble to try?
Hopefully, you will be able to lower the interest rate on your loan, shorten its term, or find a way to reduce your monthly payments through refinancing. Online calculators and a conversation with a trusted mortgage professional may help you determine the potential break-even points for a refi and find paths to a home loan more suitable to your needs.
1 - cnbc.com/2018/03/13/mortgage-refinances-fall-to-decade-low.html [3/14/18]
2 - themortgagereports.com/16096/refinance-mortgage-rates [12/9/17]
3 - lendingtree.com/home/refinance/how-much-does-it-cost-to-refinance/ [3/14/17]
4 - investopedia.com/financial-edge/1010/9-things-to-know-before-you-refinance-your-mortgage.aspx [1/12/17]
Shop wisely when you look for coverage.
Are you about to buy life insurance? Shop carefully. Make your choice with insight from an insurance professional, as it may help you avoid some of these all-too-common missteps.
Buying the first policy you see. Anyone interested in life insurance should take the time to compare a few plans – not only their rates, but also their coverage terms. Supply each insurer you are considering with a quote containing the exact same information about yourself.1
Buying only on price. Inexpensive life insurance is not necessarily great life insurance. If your household budget prompts you to shop for a bargain, be careful – you could end up buying less coverage than your household really needs.1
Buying a term policy when a permanent one might be better (and vice versa). A term policy (which essentially offers life insurance coverage for 5-30 years) may make sense if you just want to address some basic insurance needs. If you see life insurance as a potential estate planning tool or a vehicle for building wealth over time, a permanent life policy might suit those ambitions.1
Failing to inform heirs that you have a policy. Believe it or not, some people buy life insurance policies and never manage to tell their beneficiaries about them. If a policy is small and was sold many years ago to an association or credit union member (i.e., burial insurance), it may be forgotten with time.2
Did you know that more than $7 billion in life insurance death benefits have yet to be claimed? That figure may not shrink much in the future, because insurers have many things to do other than search for “lost” policies on behalf of beneficiaries. To avoid such a predicament, be sure to give your beneficiaries a copy of your policy.2
Failing to name a beneficiary at all. Designating a beneficiary upon buying a life insurance policy accomplishes two things: it tells the insurer where you want the death benefit to go, and it directs that death benefit away from your taxable estate after your passing.3
Waiting too long to buy coverage. Later in life, you may learn you have a serious medical condition or illness. You can certainly buy life insurance with a pre-existing health condition, but the policy premiums may be much larger than you would prefer. The insurer might also cap the policy amount at a level you find unsatisfactory. If you purchase a guaranteed acceptance policy, keep in mind that it will probably take 2-3 years before that policy is in full force. Should you pass away in the interim, your beneficiaries will probably not collect the policy’s death benefit; instead, they may receive the equivalent of the premiums you have paid plus interest.3
Not realizing that permanent life insurance policies expire. Have you read stories about seniors “outliving” their life insurance coverage? It can happen. Living to be 90 or 100 is not so extraordinary as it once was.3
Permanent life insurance products come with maturity dates, and for years, 85 was a common maturity date. If you live long enough, you could outlive your policy. The upside of doing so is that you will receive a payout from the insurer, which may correspond to the policy’s cash value at the maturity date. The downside of outliving your policy? If you want further insurance coverage, it may not be obtainable – or it could be staggeringly expensive.3
Take your time when you look for life insurance, and compare your options. The more insight you can draw on, the more informed the choice you may make.
1 - smartasset.com/life-insurance/5-mistakes-to-avoid-when-buying-life-insurance [4/11/18]
2 - kiplinger.com/article/saving/T063-C032-S014-could-unclaimed-money-be-yours.html [10/13/17]
3 - nasdaq.com/article/4-errors-to-avoid-with-your-life-insurance-cm868133 [10/30/17]