Securing Your Financial Future

Couples who stay together long-term usually learn how to face the cold facts of life together. One of those facts is that you might not always be together. That doesn't mean you can't plan for retirement together - just the opposite, in fact. However, planning for a scenario where one partner outlives the other or in the event of a divorce is important. That's why life insurance and retirement planning are essential parts of the puzzle.

The Role of Life Insurance

Life insurance is another crucial component of protecting your future self and your partner. While it's not pleasant to think about, having adequate life insurance can provide financial security for your loved ones in the event of your untimely death.

There are two main types of life insurance to consider:

• Term Life Insurance covers a specific period, typically 10, 20, or 30 years. It's generally less expensive than permanent life insurance and is often used to cover specific financial obligations like a mortgage or children's education expenses.

• Permanent Life Insurance is a type of insurance that includes whole life and universal life policies. These policies provide lifetime coverage and often include a cash value component that can grow over time. While more expensive, these policies can be helpful as a long-term savings vehicle and for estate planning in some situations. These policies aren't for everyone, so fully understand the pros and cons before purchasing.

When determining how much life insurance you need, consider the following factors:

• Income Replacement - If your partner relies on your income, you'll want to provide enough to replace it for a certain number of years.
• Debt Payoff - Consider any mortgages, car loans, credit card debts, or other obligations you wouldn't want to leave behind for your partner.
• Future Expenses - This might include children's education costs, weddings, or other major future expenses you've planned for.
• Final Expenses - Consider funeral costs and potential medical bills not covered by other insurance.

For couples, it's often recommended that both partners have life insurance, even if one is a stay-at-home parent. Losing a stay-at-home parent would result in significant costs for childcare and household management.

It's also essential to review and update your life insurance coverage regularly. Major life events such as the birth of a child, buying a home, or significant changes in income should trigger a review of your policy.

Retirement Planning When Both Partners Work

When both people in a couple work full-time, individual retirement investments are as easy as setting up 401(k)s in the workplace. If your employer offers a 401(k) option - especially if they match your contributions - take advantage of the opportunity to put away savings for retirement. While you can designate beneficiaries on such investments, the money primarily belongs to you in your lifetime.

Maximizing your contributions to these accounts is critical, especially if there's an employer match. Any employer matching is free money that can significantly boost your retirement savings when compounded over time.

If your employer doesn't offer a 401(k) benefit, consider an Individual Retirement Account (IRA) and other savings options. Traditional IRAs offer tax-deferred growth, meaning you pay taxes on your contributions and earnings when you withdraw the money in retirement. On the other hand, Roth IRAs are funded with after-tax dollars, but qualified withdrawals in retirement are tax-free.

Savings can be automatically deducted from a checking account each period, so you don't have to remember to make deposits. This "pay yourself first" strategy can help ensure consistent savings over time.

Retirement Planning When One Partner Doesn't Work

Individual retirement options become more challenging when one person works and the other doesn't for an extended period. Couples should discuss how they want to handle investments and savings in such cases, and both individuals should understand the importance of protecting each other now and in the future.

A Spousal IRA can be an excellent option for couples where one partner doesn't work. This account allows a working spouse to contribute to an IRA for a non-working spouse, providing tax advantages and helping to secure the non-working spouse's financial future. The contribution limits for a Spousal IRA are the same as for regular IRAs, allowing the working spouse to effectively double their IRA contributions.

Even if one spouse hasn't worked, they may still be eligible for Social Security benefits based on their partner's work record. The non-working spouse can receive up to 50% of the working spouse's full retirement benefit. Remember, Social Security benefits are subject to complex rules and conditions. For the most accurate information, consult the official Social Security Administration website or speak with a Social Security representative.

The Importance of Open Communication

Couples should have frank discussions about how they'll handle retirement savings when only one partner is working. Will you contribute equally to both partners' retirement accounts? How will you ensure the non-working partner's financial security? These conversations, while potentially uncomfortable, are essential for long-term financial harmony.

It's also important to understand how your financial situation might change if you and your partner separate. If the couple divorces after many years of marriage, the unemployed spouse might feel they have to fight for part of the retirement funds or other savings.

In many jurisdictions, retirement savings accumulated during a marriage are considered marital property and may be subject to division in a divorce. This means that even if only one spouse worked and contributed to a 401(k), the other spouse may be entitled to a portion of those savings. Laws regarding the division of assets in divorce vary significantly by state, so the advice of an attorney can help you understand the specifics as they apply to you.

Seeking Professional Advice

While it's possible to manage much of your financial planning as a couple on your own, there are times when professional advice can be invaluable. Consider consulting with a financial advisor, especially when facing major life changes or complex financial decisions.

Additionally, don't hesitate to seek help from other professionals as needed. This might include a tax professional for complex tax situations or an estate planning attorney to help set up wills, trusts, and other legal documents.

The Takeaway

Protecting your financial future as a couple is about more than just saving for retirement. It involves a comprehensive approach to financial planning that includes insurance, estate planning, and regular financial reviews.

For more information on financial planning, visit the member library.