By: Investor Solutions, Inc.
Although most of us prefer to avoid the subject of finances altogether, it’s not a topic that should be taken lightly, especially when you have a family or spouse that depends on your decisions. With all the different twists that life has to offer, you need to review and update your overall financial picture on an annual basis. The potential of a stolen wallet, divorce, re-marriage, or perhaps a sudden loss of a spouse could happen to every one of us and it can turn your financial world into a real frenzy.
Over the many years that I have been giving financial advice, the one thing that I can’t stress enough is to get your spouse involved with all of the financial decisions and various accounts maintained. I’ve seen too many cases where the husband dies and the wife is left out in the cold. In many cases, the widower knows that there’s a life insurance policy or various investments, but they just don’t know where they are. The best advice that I can give here is for both spouses to sit down together and make a list of all important documents and possessions. This should include: bank & investment accounts, safe deposit boxes, vehicle titles, mortgage documents, life & medical insurance, credit cards, important phone numbers, retirement & annuity benefits, and social security information, just to name a few. This list will most likely help you later in life when you prepare to draft such things as wills, trust documents, and homeowner’s insurance inventory.
Once you’ve developed this list, giving it to one of your children or your parents is not a bad idea either. If you’re out of town and you lose a wallet or purse, a simple phone call to your child/parent asking them to cancel your credit cards will make it less nerve-racking while you enjoy the rest of your vacation. In case of death, the process of becoming an estate administrator can be quite burdensome if the deceased maintained inadequate records. If a simultaneous death or long-term injury of both a husband and wife were to occur, the executor is challenged with the task of sorting out all the bills and assets, this can be stressful and time consuming if organized records are not available.
Taking a look at your overall picture on an annual basis will help you avoid some of the common financial planning mistakes that many couples overlook. One common dreadful mistake occurs in second marriages where one of the spouses forgets to rename the beneficiary as the new spouse on their insurance policies, IRA’s, and other retirement accounts. Sounds silly? Well, I’ve seen it happen, and the ex-spouse unintentionally got everything. While compiling the list of credit cards and mortgage documents, this forces you to document the 1-800 numbers from your statements to your list, what a great opportunity to check your interest and mortgage rates with current rates available. A simple re-financing of a 7%, 20-year fixed mortgage loan down to a 5.5% rate could save you around $175 per month on a $200,000 loan.
Another common mistake among married couples is the lack of coordination of retirement decisions. Health benefits during retirement need to be considered prior to making your decision to retire. For virtually all Americans, they will not qualify for Medicare coverage until reaching the age of 65. Unless you can receive benefits from your spouse’s employer, you’ll now have to seek the private health insurance coverage market for a policy. For a retired 60+ couple, you can figure on spending at least $600 a month in premiums for a husband & wife health insurance policy, and this excludes the cost of the medications. Some employers do offer their retirees subsidized health benefits as an initiative for early retirement, however; fewer employers are now offering these types of benefits.
Many retirees with defined benefit pension plans are also faced with making another important decision as they enter retirement. Upon retirement, your employer will ask you to make a non-reversible decision concerning the payout of your monthly pension benefit. In most cases, you are given at least two options, the most common being: 1) a larger amount that will be paid each month and cease upon your death (single life option); or 2) a lower amount that will continue until the last spouse dies (known as the joint survivorship option). For many couples this decision is a no-brainer, take the lower amount (joint survivorship), and guarantee payments until both of your deaths. But what if the difference in payout per month is $2,500 for the single life and $1,800 for both lives? This is an additional $700 per month or $8,400 per year. Now, this is where you’ll need to do some planning and research. Would it be more beneficial to elect the single life larger payout and use the additional $8,400 to pay for an insurance policy on the spouse of the pension plan? If you’re not yet confused, consider this…what if you could find a $500,000 permanent life insurance policy for an annual premium of $5,000? You could purchase this policy, and still have an extra $3,400 in your pocket each year, while assuring that your spouse receives $500,000 to live on upon your death. Just something to think about before you rush into that joint survivorship option.
As you can see, many financial mistakes can be avoided if you just make the time to review your finances at least annually or seek professional help. Choosing when to retire is a complex family decision as well, and you’ll really need to look at the whole picture to make sure there are no surprises that lie ahead (hint: cost of medical coverage). Take the time to review your social security benefits statement that is mailed to you around your birthday. Compare this figure with your current savings/investments and calculate how much you’ll need to live on in retirement. Are you on target? If not, the dream of early retirement at age 62 may need to be postponed until you’re truly ready. The reward of avoiding mistakes like those above is certainly worth the few extra bucks spent to seek the advice of a professional, such as a certified financial planner or certified public accountant.