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Money and marriage: 5 tips for newlyweds
How to get a good start on a financial partnership that can last a lifetime.
When you say “I do,” it’s not just about love, it’s also about money. When you get married, you tie a financial knot that you have to keep strong throughout your lives together. It’s a matter of setting money expectations from the start, making careful financial plans together, and checking in with each other regularly to keep your finances on track as things change.
“Don’t let disagreements about spending or different attitudes about money derail your newlywed bliss,” says Chris McDermott, CFP,® and senior vice president of retirement and financial planning at Fidelity Investments. “Recognize that you are partners in financial planning, and take that partnership seriously.” Here are five ways to help successfully unite your financial lives.
1. Get organized
If you didn’t talk seriously about how you’ll manage money together before you got married, now is the time to start. Open communication about what you have, what you owe, what you spend, and how you feel about investing should all be part of your conversation. In other words, avoid financial secrets.
2. Set goals
Because much of what couples do together comes down to dollars and cents, set some common goals, whether it’s buying a home, taking exotic vacations, or planning for retirement. Work together to figure out what you can realistically afford. For example, try the mortgage calculator at Bankrate.com to see what you might spend on a house.
Next, make disciplined saving a habit. Making automatic investments takes the burden out of saving and helps keep you on track.
Finally, match your investments to your goals. For short-term goals, like a down payment on a house, you may want relatively stable and liquid fixed income investments, such as a money market fund, bond fund, or even CDs, as opposed to stock funds.
For longer-term goals, like saving for retirement or college, you and your spouse should choose a proper mix (asset allocation) of stocks, bonds, and short-term investments based on your risk tolerance and time frame for investing. Though you both might come into the marriage with your own investments, be sure to review your overall portfolio together, to avoid overlap in your investment strategy. To check or set up a proper mix, try Portfolio Review.
3. Minimize taxes
Once you’re married, you need to review your tax withholding and the ways you invest to potentially help minimize taxes and maximize your retirement savings.
Tax-filing change. When your marital status changes, you must fill out a new Form W-4, Employee’s Withholding Allowance Certificate, with your correct marital status and number of W-2 withholding allowances. These determine the amount withheld from your wages for federal and state income taxes.
Saving for the future. Tax-advantaged accounts like workplace savings plans, health savings accounts (HSAs), and IRAs can help you plan wisely for your long-term goals. Earnings in tax-deferred accounts can compound faster than those in taxable accounts because all your potential earnings remain in the account tax deferred—adding to your earning power until you withdraw them.
If each of you has a workplace savings plan like a 401(k) plan or 403(b) plan, contribute as much as you can—at least enough to earn any company-matching contributions. Then, over time, try to contribute the pretax maximum $17,000 each in 2012 if you’re under age 50, or $22,500 if you’re 50 or older. (Increase your workplace contribution rate.)
Also, consider contributing to an IRA or an HSA for more tax-advantaged saving. Those under age 50 can contribute up to $5,000 to an IRA in 2011 and 2012, and those age 50 or older can contribute up to $6,000 in 2011 and 2012. With HSAs, you can contribute up to $6,250 for family coverage in 2012 ($7,250 if 55 or older), and withdrawals are tax free if used for qualified medical expenses.
4. Protect what matters most
When you get married, you need to review, update, and in some cases purchase different types of insurance, including life insurance, to help protect your loved ones, health insurance, and disability insurance.
Some insurance coverage may be provided by your employer. But if you’re both working, says McDermott, “review your current coverage to see where you can cut costs and avoid redundant coverage.” For example, it might be less expensive to be on your spouse’s health insurance than pay for your own.
Life insurance can help replace lost income and eliminate debts, which enables surviving family members to maintain their lifestyle. Life insurance proceeds are generally free from income taxes.1
Decide together whether you want to buy term or permanent insurance. Term life insurance, which is generally less expensive, provides coverage for a specified time period and pays a benefit only if you die during that time period. Permanent life insurance (generally more expensive) remains in effect for as long as you live, and offers an investment component (cash value) that grows tax deferred. How much insurance do you need? Try our Term Insurance Needs Estimator.2
If you’re employed, you’ll also want to consider whether group life insurance offered by your employer is enough to cover your needs, or whether it makes sense to buy an individual policy as well. (For more insights, read Protect yourself with layered life insurance.)
Disability insurance usually covers a portion of your salary if you become disabled before retirement. Your employer may provide you with coverage, but make sure it’s enough to cover your expenses. If not, consider purchasing this insurance on your own, since an unexpected event could prevent you from working and earning a paycheck for some time.
5. Create a will
Your will is the most important legal document in your estate. It establishes your wishes with respect to the distribution of your estate and provides direction on how they should be carried out after your death. Even if you already have a will, you’ll have to update it when you get married. Dying intestate—or without a will—can wreak financial havoc on surviving family members. Estate laws vary from state to state, but in the absence of a will, surviving spouses without children typically retain only between a third and one half of the deceased’s estate.3 You and your spouse should contact your attorney for more information and create wills as soon as possible. Be sure to review them every three to five years to make sure they address your changing circumstances.
Money discussions aren’t always easy for newlyweds. But, as with any marriage issue, it’s best to approach them with an open mind and as a team. The more thoughtfully you work together on money matters, the more financial harmony you’ll maintain in your life together.
Before investing in any mutual fund or variable annuity and its investment options, please carefully consider the investment objectives, risks, charges, and expenses. For this and other information, call or write Fidelity for a free prospectus or, if available, a summary prospectus. Read it carefully before you invest.
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