Couples should coordinate asset allocation across all of their retirement holdings, including those in employer plans.
Moving from the “I” vs. “we” mentality in planning for life’s goals.
Planning for life’s finances can be challenging enough for one, but when doing so for two people, it’s even more important to take the time to do it – and to do it right.
If you are a partner in a couple that rarely if ever discusses finances, it may be time to schedule a conversation. If you are married, you are already subject to joint taxes. It makes sense to discuss the individual decisions you are making that contribute to the rate of taxation that you both share.
Even more important will be a discussion about how to sustain your life bond into retirement. And how to do so by allocating all assets, including all holdings in employer retirement plans.
As a financial planner, I work with couples who are trying to move from “I” to “we” mentalities when planning for life’s goals. In community property states, there is already a reality defined by law about what constitutes shared or marital property. Retirement plans fall into the shared category. But somehow, many people overlook this when making decisions about how to make choices about their workplace retirement plans.
Better communication by partners about goals and how to fund them can strengthen commitments that they have already made to each other. This discussion can also reduce anxiety about where salaries may be going and whether joint savings will be enough to finance retirement.
This discussion can be even more important for same sex couples. The June decision by the US Supreme Court to uphold the right to same sex marriage throughout the United States has led many people to reevaluate their retirement plans – and other retirement related choices.
Here are seven ideas for coordinating 401K or equivalent plans, with those of your spouse.
-Discuss your relative savings goals, the timeline for achieving them, your taxation rate, and whether your annual deferral rates will allow you to retire by the age you desire. In your review, consider any difference in your ages, other savings you may have, your relative tolerances for risk, types of investments you have available to you in employer plans, and how you might allocate among them to balance risk and reward.
-Various online calculators are available that can estimate the rate of savings and return necessary to arrive at a given dollar figure over a specified period of time. These are approximate calculations that should be vetted by a financial planner and or tax professional on a periodic basis.
-Look deeper into your plans to determine how to optimize among the funds provided. Some plans offer lower fees on funds and lower overall expenses allocated by participant. Examine how the individual funds are rated. You can even chart relative performance using no-cost tools on such websites as http://finance.yahoo.com.
-Determine how to weight the strategic asset classes offered in your plans, which include equities, fixed income, and cash. Using a website such as www.morningstar.com can help you choose an approximate mix to reduce risk of overexposure in any one category. If your plan is a 403b, you may also have the option to invest in a tax deferred insurance contract, also known as an annuity.
-Judge whether some assets you would like to hold would be better held in a taxable account. These might include tax exempt municipal bonds and stocks that pay no dividends – but that offer substantial opportunity for appreciation. If available to you, you could also holding such stocks in a Roth IRA, which can allow you to forego taxation upon the sale of these holdings provided you satisfy the other requirements imposed by the IRS.
-Once you have decided what assets to hold in what mix, be sure to rebalance this mix quarterly. Equities usually outpace bonds, so to hold true to fixed income weight you will need to sell off a little equity each quarter. You would then reinvest the proceeds into fixed income.
-Review all fund choices at least once a year and don’t be afraid to jettison funds that are off target or that are underperforming their category. If your two plans offer vastly different menus of fund selections, compare the funds available in both plans. Choose the best funds from either plan and allocate as if you were managing a single portfolio.
-Update beneficiary information as needed. Be sure to indicate your spouse as a primary beneficiary; and to choose a contingent beneficiary as appropriate. If you elect to name a trust as a beneficiary, be clear on the tax impact of this decision. Any trust document used should offer some language about pass through rollovers so that heirs aren’t forced into a tax event. Better yet name the heirs as contingent beneficiaries, so that tax glitches don’t force lump sum payouts at higher tax rates.
If you find yourself struggling to get on the same page as your partner in this conversation, a financial planner can help. The subject of money is often touchy. We help our clients with the negotiation necessary to arrive at consensus.