Financial advice I would give to my younger self – Planning for a young family
As a planning expert who frequently attends the speaking tour, I am often asked, “What else should we know?” I always look at young viewers and think – if only I knew at the time. That’s the motivation behind this expert series on planning advice I would give to my younger self. Last month, I wrote the first of four articles and started with the topic of education finance planning. This month, I’ll follow my younger self past college and my first job, and into the next “typical” stage of life – getting married and starting a family.
When you meet the love of your life and talk about marriage, it’s often hard to think beyond the immediate excitement of the engagement, wedding, and honeymoon. However, discussing your financial philosophy with your future spouse is essential. After all, you make a contract to live your lives together, and therefore make decisions together, until death do you part.
Consider a prenuptial agreement
Here comes the dreaded “P” word: prenup. As people tend to marry later in life, one is more likely to marry having already obtained a certain level of assets, which must be protected in the event of a divorce, most likely with a prenuptial agreement. Marriage laws vary in each state. For example, communal ownership states, such as California, Washington, and Texas, follow the general rule and presumption that assets are divided 50-50 with divorced spouses. Meanwhile, equitable distribution states, such as New York, Connecticut, and Florida, use a variety of factors to determine what is “fair and equitable.”
Not only must we understand the matrimonial regime that governs their union, we must understand its nuances. For example, in New York, while assets brought into a marriage are generally considered separate property that is not part of the division of marital property, the income and appreciation of such separate property may be marital property. subject to division.
What happens when you combine assets with your spouse and open a joint account? What if your spouse contributes to the mortgage, but the title deed is already in your name? There are many of these types of questions that brides and grooms with existing assets need to think about and agree on, so there are no surprises if the marriage doesn’t work out.
I can fully understand and appreciate how difficult the premarital conversation can be. I always tell my clients – they’re two consenting adults making a choice for life together. You want to understand the terms of everything you do in life, no matter how transactional and transient, a job offer, buying a car or a house, why wouldn’t you do the same thing for what amounts to a lifetime contract?
Align with financial goals and philosophy
Have you had a conversation with your loved one about your financial goals, spending, and savings philosophy? If not, you absolutely need it because it is the very foundation of the life you will build together.
Here are some sample topics to get you started:
- Do you plan to make a common budget, and if so, who will contribute to what?
- Is there an agreed spending limit where the other spouse must be consulted?
- Are you both on the same page when it comes to risk tolerance in investments and comfort level with debt?
Start by talking in broad strokes with long-term horizons in mind:
- When do you really want to retire?
- Are there financial milestones that you would like to reach at a certain stage in your life?
- Are there any current or future financial obligations that the other should be aware of (for examplecaring for aging parents, alimony)?
Once you’ve agreed on a financial goal, explore the immediate next five years with these long-term goals in mind:
- Is your joint income sufficient to support your combined lifestyle? If so, what will you do with the surplus?
- Are you going to spend, save, invest or maybe a combination?
- If income is insufficient, what can you remove and for how long?
- Will you buy a house or rent? How much can you afford and do you have an agreed plan to save for the down payment?
- Are you going to rename your accounts together or keep them separate?
Although there are no right or wrong answers, the process of going through these questions and having this discussion is very important.
Be prepared when you expand your family
Once married, and especially when you have an upcoming child, it’s important to make sure your estate plan is in order. At a minimum, everyone needs a will, power of attorney, medical power of attorney, and living will (the latter two often being combined in one document).
A will is the legal document that determines who inherits your property when you die. Without a valid will, your estate would be subject to your state’s intestate laws, which describe your next of kin for inheritance purposes. The intestate laws of each state generally follow family lines – spouse, children, parents, siblings, etc. While a lot of people may find this acceptable, what a lot of people don’t think about is How? ‘Or’ What their relatives will receive these assets. If your beneficiary is too young or not yet capable of making financial decisions, should the assets be held in trust for the benefit of your beneficiary instead? If you have a minor child, who will be your child’s guardian if both parents are deceased? To me, the most important reason for a young parent to have a will is to appoint a guardian of your choice for your minor child(ren).
Another common mistake is not updating your beneficiary designation on your pension plans and insurance policies. These are “non-probate” assets that are not subject to the terms of your will. Rather, the inheritance of these assets is governed by the beneficiary you named in the individual plan or policy. For a newly married couple, state law or often the pension plan policy itself would automatically designate your spouse if you left the beneficiary blank. However, these default rules generally do not apply to children.
Here’s a mistake I made when I was young: when I had my first child, I updated my beneficiary designation to show my husband as the primary beneficiary and my son as the secondary beneficiary. When my daughter was born, it took me years to realize that I had never added her to the list. I had accidentally disinherited my daughter simply because I was too busy with work and was a mother of two young children. Lessons Learned Estate planning isn’t a one-size-fits-all thing – you need to constantly review and update it, especially if you’ve just had a life event.
Protect yourself against an unthinkable catastrophe
Now that you have a family and dependents, it’s important to think about risk mitigation and protection. Do you have the appropriate life insurance coverage should anything happen to you? At a minimum, I believe everyone should have a term insurance policy to help the surviving spouse with immediate cash flow needs and any ongoing fixed expenses.
I am often asked: what insurance is enough? Much depends on your needs, and the best way to quantify this need is to have a financial plan geared towards the needs of the survivor. Common factors to consider in such an analysis include sufficient coverage to pay fixed costs like a mortgage or to carry dependents to a certain point in life, such as graduating from college. .
For many couples where one spouse may choose to stay home to care for young children, the immediate reaction may be that only the earning spouse needs to be insured. It could be a mistake. If something were to happen to the stay-at-home parent, you would likely need to hire someone to provide childcare and other in-home services, which costs money. Alternatively, you can consider taking a less demanding job so you can be home with the kids more in this situation. All of this means additional costs that need to be covered, and having a life insurance policy can help you meet those cash flow needs.
Hope this was helpful, and stay tuned for next month’s column: Financial advice I would give my younger self: Planning for retirement and having enough of a nest egg to make it happen.
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Note that tax, estate planning, investment and financial strategies require consideration of the suitability of the individual, company or investor, and there is no guarantee that any strategy will be successful. hit. Wilmington Trust is not authorized to and does not provide legal, accounting or tax advice. Our advice and recommendations are provided for guidance only and subject to the opinions and advice of your own lawyer, tax advisor or other professional adviser. Investing involves risk and you can make a profit or a loss. There can be no assurance that any investment strategy will be successful.
Chief Wealth Strategist, Wilmington Trust
Alvina Lo is head of family office and strategic wealth planning at Wilmington Trust, part of M&T Bank. Alvina was previously at Citi Private Bank, Credit Suisse Private Wealth and a practicing attorney at Milbank, Tweed, Hadley & McCloy, LLC. She holds a BS in Civil Engineering from the University of Virginia and a JD from the University of Pennsylvania. She is a published author, frequently lectures, and has been quoted in major media outlets such as “The New York Times.”