With love, marriage, and kids come new financial responsibilities. Creating a family wealth management strategy is important for creating short- and long-term security, as well as achieving specific goals with your money. Knowing where and how to invest as a couple, or as a family, is critical to making your wealth plan work for you.
Approaching Family Wealth Management as a Couple
Managing money and making investment decisions as a couple can sometimes be challenging if you have different financial goals and different ideas about how to achieve them. In a 2018 Fidelity Investments survey, for example, more than four in 10 couples disagreed about the age at which they should retire and 54% couldn’t agree on how much they’d need to save for retirement to enjoy their desired lifestyle.
Making family wealth management work as a couple requires a certain amount of give and take.
These tips can help you find some common ground as you develop your investment plan:
AGREE TO COMMUNICATE OPENLY AND OFTEN ABOUT YOUR VISION FOR WEALTH AND INVESTING.
A 2018 PolicyGenius survey found that 20% of couples don’t manage their finances together. While you don’t necessarily need to combine investment accounts, bank accounts or other financial accounts, you should at least be able to talk about them.
CLARIFY YOUR GOALS AND EXPECTATIONS.
You may be expecting to retire at age 50 with $2 million in the bank but if your spouse plans to work until age 65, that could lead to a clash over investing strategies. Getting clear on what your goals and expectations are where your money is concerned can help you determine together whether they’re realistic and come up with a plan for achieving them.
DISCUSS YOUR APPETITE FOR RISK.
Risk tolerance plays a big part in determining how you invest as a couple. If one of you is comfortable taking more risk but the other isn’t, that will directly impact how you invest. For example, rather than pooling your investments together, you may opt to maintain separate portfolios instead. Having a discussion about risk can help you figure out what’s going to work best for both of you.
Where and How to Invest as a Couple
Talking about investing as a couple is important but at some point, you actually have to begin investing if you want to put your family wealth management plan into action. The types of accounts you can use to grow your investments include:
Your 401(k) or a similar workplace plan
Traditional and Roth IRAs
A spousal IRA if one of you doesn’t work
Health Savings Accounts if one or both of you is enrolled in a high deductible health plan
Taxable brokerage accounts
When you’re investing as a couple, consider what percentage of each of your incomes you can reasonably contribute to each of these accounts, starting with your 401(k). At a minimum, you should be contributing enough to get the full employer match if one is offered.
With an IRA, you also have to keep in mind that your combined income as a couple may determine whether you’re able to deduct the full contribution to a traditional IRA or make contributions to a Roth IRA. Reviewing your income can give you an idea of which type of IRA is best.
For example, if you’re both eligible for a Roth IRA and you anticipate being in a higher tax bracket later, you might choose this account to take advantage of tax-free distributions in retirement. But if you’re both making a higher income now, you may want to choose a traditional IRA to take advantage of any deduction you’re allowed for contributions.
As far as what to invest in goes, the general rule is that the younger you are, the more risk you can afford to take. But you also have to keep diversification in mind as a couple to ensure that your portfolio (or portfolios) include the right mix of assets to meet your goals without exposing you to more risk than you’re comfortable with. In general, the types of investments to consider include:
Exchange-traded funds or ETFs
Couples may also want to think about where alternative investments fit into their family wealth management plan. If you can work well together, flipping real estate may be something to consider. Investing in a Real Estate Investment Trust (REIT) is another option, as are things such as cryptocurrency or precious metals. Remember, it all comes down to what you can agree on, what can help you meet your investment goals, and how much risk you want to take on.
Family Wealth Management Tips for Parents
Having kids can change your financial plans to a degree if you have to adjust your budget to accommodate new expenses or your income shifts because one parent is taking time away from work to care for young children. For instance, you may have to add daycare or a nanny to your spending and as kids grow older, you may be budgeting for sports or extracurricular activities. And you may want to increase the size of your emergency fund as your family grows to help cover unexpected expenses.
The investment tips offered earlier for couples can still apply to families with kids, but there’s something else to add to the plan: college savings.
For the 2018-19 academic year, the average cost of tuition, fees, and room and board at a public, four-year university totaled $21,370 for in-state students and $37,430 for out-of-state students. The cost at private universities totaled $48,510.
Creating a plan for college savings as early as possible can help parents prepare without derailing their larger family wealth management plan. Opening a 529 college savings account is a good first step. These accounts allow parents to invest their savings (usually in mutual funds) with tax-free growth and tax-free distributions when the money is used for higher education expenses. A Coverdell Education Savings Account operates similarly, although this account allows for a maximum contribution of $2,000 per year.
Other ways to save for college include opening a high-yield savings account or creating a CD ladder. When weighing the options, remember that savings accounts and CDs are usually the safest in terms of risk. With a 529 account or Coverdell ESA, your money is invested in the market. Review mutual fund options carefully to gauge whether they fit your investment needs and pay close attention to the fees so you know exactly what you’re paying.
Together, these tips can help you create a solid family wealth management plan, but remember to check in with your plan regularly. Reviewing it on an annual or bi-annual basis can help you determine whether any adjustments need to be made to stay on the right course.