While the reasons for earning two incomes may vary from couple to couple, these families often face a similar financial challenge: participation in separate retirement programs.
As a couple, your combined retirement assets are not just limited to what you may have accumulated in your current employers’ retirement plans. You also need to consider any older accounts that are still sitting in former employers’ plans, or assets that have been moved to rollover IRAs. After inventorying your various retirement assets, consider some areas where a joint planning effort may help enhance your investment outcome.
Planning your finances together has the added benefit of each spouse knowing “the lay of the land” should one of you pass away unexpectedly. Far too often, we see clients in our office who come to us following the death of their spouse, saying “I am absolutely in the dark as to where we are financially.” While there is generally one person who takes the lead in making financial decisions, it is important that the other spouse have a general understanding of their insurance, investments, debts, taxes and cash flow in order for them to make knowledgeable decisions if they are suddenly without the decision maker.
Many couples have found it beneficial to meet with a financial advisor to discuss their financial plan.
Setting a Mutual Goal
Pursuing the goal of retiring together requires a long-term approach. Start by determining how large a combined nest egg you will need. This will depend on how much you have already saved and when you hope to retire, as well as your retirement lifestyle choices — where you plan to live, whether you plan to maintain more than one residence, and what you plan to do with your time. All of these factors will affect your retirement income needs.
Keep in mind that Americans are living longer and that one or both of you could spend 20 or more years in retirement. Also carefully review the potential financial benefits of delaying retirement. Working for an extra few years could enable you to continue making contributions to your IRA or employer-sponsored retirement plan and delay taking withdrawals.
Asset allocation — As with any investment portfolio, your retirement accounts should work in unison to pursue a single accumulation goal. Ask yourselves whether your overall asset allocation is appropriate for your combined objectives and risk tolerance. Are the portfolios adequately diversified? Are they overweighted in any one asset class or individual security? Also, consider how your retirement portfolios complement your other assets, such as taxable investment accounts and real estate.
For couples in or near retirement, an equally important part of the planning process is determining when and how to withdraw money from retirement accounts. Consider which accounts (i.e., taxable vs. tax-deferred) to tap first. It may be better to liquidate assets in taxable accounts, allowing assets in IRAs and qualified retirement plans to continue growing tax-deferred. Remember, however, that with few exceptions, the IRS requires individuals to begin withdrawing money from tax-deferred accounts no later than age 70½, at which point you may want to rethink your distribution strategy.
The key to remember as you approach retirement is this: You are playing by a different set of rules when you are drawing money from your retirement accounts than when you were accumulating money. Therefore, your strategy should be different. At GenWealth Financial Advisors, we have seen clients have great success with the Income for Life Model strategy, which time segments your investment portfolio to provide risk-adjusted income that is scheduled to increase periodically throughout your retirement years. Of course, no strategy can 100% assure success, but having a plan that both avoids withdrawals from a volatile asset, while allowing time for other “buckets” of money to potentially grow could be a formula that allows you to possibly avoid running out of money before your run out of time.
These are just a few of the issues dual-earner couples need to consider when managing their individual retirement plan accounts. Since no two couples’ financial situations are alike, the best course of action may be to speak with your financial advisor about devising a coordinated plan for meeting your future financial needs.