EP 11 – Financial Planning For Couples

Financial Planning for Couples: Essential Steps and Tips

In this episode of the Washington Retirement Planning Podcast, host Ethan Meikle provides valuable advice on financial planning for couples.

He emphasizes the importance of communication, goal setting, budgeting, and saving for retirement. Ethan also answers a listener’s question about retirement tips for young professionals, covering topics like taking inventory of finances, dealing with insurance, and understanding taxes.

The episode features practical tips and tools to help couples maximize their retirement benefits and ensure a stable financial future.

 

00:00 Introduction to the Podcast
00:27 Main Topic: Financial Planning for Couples
01:11 Step 1: Communication is Key
04:01 Step 2: Creating a Budget
05:25 Step 3: Allocating Extra Money
06:15 Step 4: Insurance and Risk Protection
08:23 Step 5: Managing Debt
09:14 Step 6: Building an Emergency Fund
10:15 Step 7: Regular Maintenance and Adjustments
10:56 Listener Question: Tips for Young Professionals
18:08 Investment Advice and Strategies
20:29 Conclusion and Legal Disclosure

Plan 3 Investment Advice

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Transcript




(00:02) [Music]
Hello and welcome to another episode of the Washington Retirement Planning Podcast. I’m your host Ethan M., and if you’re new here, I help Washington state employees get a better understanding of how their confusing retirement benefits work so you can hopefully take that information, retire earlier, spend more time with your loved ones, and ultimately pay less in taxes overall.
Today we’re going to be talking about financial planning for couples. We’ll be going over a few steps that you can take as a couple to get a better understanding of how your finances work and what you can do together to help maximize your retirement benefits and ultimately build a bigger and better future.
I’ll also be taking the time to answer another listener question. Today’s question comes from Ann, who I had the pleasure of meeting with just a few weeks ago. Ann’s question was about tips for young professionals on what they could be doing now to help set themselves up for success later. So, I have a couple of tips to pass on to you guys, and we’ll be sure to cover that towards the end of the episode.

(01:05)
Now, on to the main topic of today: financial planning for couples. So, the first step in this process, as always, is going to be communication. Communication is key. You also want to make sure you’re on the same page when it comes to finances. Even if one spouse handles it all and the other spouse has nothing to do with it, you still need to come together and talk about things, from budgeting to investing.
Really, the main thing you want to start off with is your goal planning. After all, you can’t really start a path unless you know where the destination is. So, you need to know what kind of goal you want to set. Now, I would ask you to stay away from money goals. Saving up for retirement sounds cool, but it really doesn’t mean much to people. Everyone’s retirement is different, and I wouldn’t shoot for any particular number in general.
Instead, you want to focus on the key things, like “Do we want to have our house paid off by a certain time?” or “Do I want to retire at 62 or 65?” Things of that nature, something a little more concrete that we have a bit more control over.

(02:01)
So, we want to start off with what our goals are, and once we have those goals set in stone, then we can kind of work backward and figure out our plan of how to get there. Start off with that, and you want to be open with what your plans are. Keep in mind that you may have some disagreements. We see this all the time in some of our meetings.
For example, one person might want to pay off the house early, while the other doesn’t. So, you have to come together and try to figure out which way you want to go and find some kind of middle ground.
This is something that we see all the time in our meetings. Our favorite couples by far to work with are the ones that are both there, that show up, and both of them are actively engaged. You know they have good communication skills because they both know what’s going on. I can ask either one of them the questions, and they’ll give me pretty much the same answer about what they’re thinking and planning.

(02:48)
The ones that I kind of worry about are the ones that show up where it’s just one spouse present, and the other one is too busy or sitting on the couch in the background, just like they can’t be bothered to talk about their finances. It doesn’t apply to them or something like that. Those are usually not good situations.
Another scenario is when one spouse just sits there and doesn’t say anything. The question then is, do they want to be there? Do they know what’s going on? They need to be a part of it because if something happens to that one spouse, you’re going to have to figure out where the documents are, what the passwords are, and what the plan is. If you weren’t engaged all these years, you’re going to be in over your head.

(03:12)
So, we want to be engaged. By far, I guess the funniest ones to deal with are the ones where the spouse, usually the husband, is off to the side of the camera, kind of like this, and you see their hands just folded, and you can tell they don’t want to be there. I guess the wife made them sit there or something like that, but they’re sitting there, even off-camera, so they really don’t want to be there.
Those couples, most times, are usually not in the best place financially, at least from a communication standpoint. They don’t really know what’s going on. So, make sure you have good communication skills, and when you show up to a meeting, whether it’s with me or someone else, be present, be active, and both be in the frame. It makes everyone look a little better in general.

(04:00)
All right, second step: Now that we have our goals set up, what you want to do next is work on a budget. Yeah, I know, no one likes budgeting—it sucks seeing where all your money goes, and it kind of hurts—but it can be really eye-opening to actually sit down and see where the money is going.
It doesn’t have to be something that is real specific; you can just give yourself ballpark ideas of what your budget could be. But the best thing to do is to go back over the last 12 months—yes, I know, I said 12 months—go through your bank statements, credit card transactions, and kind of get an idea of where you stand.

(04:27)
Now, you want a quick tip on an easy way to do this: use an aggregator app that can pull these transactions for you. They can just download it all in one file. Personally, I use something like Mint. I just have all my credit cards and bank accounts listed there. So, at the end of the month, I can go in there, say, “Hey, download all card transactions, all bank transactions,” and then I just pull them all into one Excel sheet, hit the sum button, and I instantly have what my income was and what my expenses were for that month.
So, it doesn’t have to take a lot of time; you just have to have the proper tools in place to help you get that set up. When you do this, you might be kind of surprised—the numbers might be higher than you think. I know that was the case for me when I did this same exercise for our household.

(04:52)
So, sitting down and getting the budget actually on paper to see what’s actually going out versus what you think is going out is important. Once you know what you’re spending, you can see areas where you can cut back and really see how much money is left over that could be used toward saving for your goals.
Once you have all that set up and your budget in place, step three is deciding what to do with the extra leftover money. Before you go and do anything extra, above the basics like mortgage, food, fuel, and things like that, you want to make sure that you’re saving enough for yourself in the future.

(05:16)
So, savings comes into play, and that’s something you need a lot of communication about as well. Where are we going to be saving this money? Does it go into my retirement plan? Does it go into your retirement plan? Do we have our own independent one, like an IRA?
You have to talk and decide what’s the best place to allocate that money. That’s where an advisor can come into play as well—to help you figure out the best strategy to use. If someone has a match, it usually makes sense to put it in that person’s account, at least until you hit the match, and then you can figure out what to do with the excess money after that. Figuring out where to go and what stocks to pick would be the next step.

(06:06)
Now, after that, or you could even argue before that, you want to make sure that you have the proper insurance coverages in place. After all, what good are all the assets and money that you have if it can all be lost just like that because you don’t have the proper risk protection in place?
When we’re talking risk protection or insurance here, we’ve got to look at all of it. We’ve got to look at our home insurance policies, your car insurance policies—if you have half a million dollars saved for retirement but you’re running minimum coverages on your vehicles, chances are you get into one bad accident, they hit the limits on your policy, and they need more. Where are they going to go? That’s right—they’re going to go right to your retirement account.

(06:31)
So, you want to make sure you have enough coverage in place so that they can take the car insurance company’s money and not yours. Other things to consider are something like umbrella policies. The policy is relatively inexpensive and gives extra liability coverage that goes over your house and your car, right? It’s the umbrella, so it’s just an extra line of defense to help cover your assets.
Especially when you start going over the half-million-dollar asset level—that’s usually where car insurance coverage kind of tops out—once you start crossing over that area, that’s a good time to look at umbrella policies.

(07:24)
Next would be looking at something like life insurance. You want to make sure you have something in place so that if someone passes away, you can replace their income. That’s the number one reason for life insurance. Yes, paying off debt is part of the reason too, but the biggest asset most people have is their ability to work and earn income.
Really, the rule of thumb I like to tell people is you need about a million dollars of coverage for every $50,000 of income you need to replace. So, if I work and make $100,000 a year, I should have at least $2 million of coverage. Why? Because if my spouse were to receive $2 million, they could take 5% of that a year, which would be $100,000. It would essentially replace all of my lost income. If it’s invested correctly, it should keep maintaining that for years to come.

(07:50)
So that’s why you need to have the proper level of insurance in place. I know some people have small policies—$250,000, $500,000—just to cover the house. That’s great, but once the house is paid off, there are still going to be bills that need to be paid, so you need to have something to help replace your income. Life insurance is a great tool for that.

(08:20)
The next step is dealing with debt. If you have student loan debt, mortgages, cars, things like that, the question is: What strategy are we going to use to help pay off the debt? There are a couple of different ways you can go about it. I usually use something called the avalanche rule. Basically, I’ll take any debt payments and sort them from the highest interest to the lowest interest, and I’ll pay off the highest interest one first.
I know some people like to go from the highest balance to the lowest balance or even reverse it, from the lowest balance to the highest balance. The idea is to pay off the lowest balance first, use the minimum payment, and snowball it down that way. That could work, but if my lowest balance one is only charging me 2% and my highest balance one is charging me 30%, I’m going to make a bigger dent in terms of saving on interest if I start paying off the higher interest one first.
So that’s the way I look at it when doing debt payoff strategies.

(09:14)
Another good thing to have as a couple is making sure that you have money set aside in an emergency fund to cover any kind of one-off expenses, like maintenance on the house or having to change the tires on your car. You want to make sure you have some money set aside to cover these kinds of one-off expenses that can come out of nowhere.
Now, the important thing that I see a lot of couples do is get carried away with this. Instead of having, you know, $20,000 or $30,000 in there, they have $50,000, $100,000, or some even $200,000 in cash just sitting there for “just in case.”
Now, can you tell me what in the world could possibly happen that you need $200,000 liquid to spend just like that? Unless you’re buying real estate or something like that, it’s probably a bit too much, and you’re just losing a lot of interest, especially if you’re not putting it in a high-yield interest account.

(10:06)
While emergency savings are important, you don’t want to get too carried away with it because, especially remember that once you’re at retirement age, all the money you have, regardless of what retirement account it’s in, is liquid and accessible to you. So, you don’t need to have such a high amount of cash on hand at that time.

(10:31)
Now, the final step to all of this is maintenance. It’s one thing to go ahead and get a plan all set up, but it’s another thing to maintain it because, over time, things are going to change—income changes, your lifestyle changes. You want to make sure that you’re keeping up with this. You want to make sure that the budget stays on track, that your investment strategies are staying there.
If you notice that your spending is starting to creep up, maybe you need to increase your savings. If you see your savings do the opposite and start to go down, maybe you need to go ahead and adjust the budget. Regular maintenance is really important. If you need some accountability and help with that, that’s where an advisor might come into play—someone that’s a third party, kind of independent, that can look at your strategy and tell you what you need to do to help increase your odds of achieving your goals.

(10:56)
All right, so on to the question of the day, which comes from Ann. Again, the question is: “What tips do you have for young professionals who are just getting started in their careers in terms of getting a strong start toward retirement savings and planning?”
So, as far as tips go, it’s always best to start with taking inventory of where you’re at. Make a list of what your income sources are, where that money is going, what you’re spending it on, what your retirement assets are, and what your liabilities are. Take an inventory and put that all together to essentially make your own balance sheet.

(11:22)
A balance sheet, just like the ones you’ve probably heard the term before that all companies have, essentially lists what their assets are minus their liabilities, which gives you their net worth. You want to keep track of that for your household. It’s something you don’t have to pay super close attention to, but it’s something to update kind of once a year. You can slowly see yourself track upwards as you start paying those debts down, as assets start growing, and you’ll see your net worth start getting bigger and bigger.

(11:45)
So now, once you figure out where you’re at, the next step is to dig into your budget. I would say that the only thing stopping you from retiring is that you don’t have the income to replace it. So, look at what kind of income is coming in now and where it’s going. Is there anything I can get rid of or reduce to help free up some cash flow so I can put it toward building other assets? Always take an inventory of what needs to go.

(12:13)
Now, a couple of hidden ones you might not know about: Go ahead and look at your car insurance. If you’re paying monthly for car insurance, if you switch that to quarterly, semi-annually, or annually, that alone could shave off a couple of hundred bucks off your car insurance bill. Another thing you can look at is your deductible. If you have a healthy emergency fund, you probably don’t need your deductible to be $100. You could probably increase that to $500 or $1,000 because when we have higher deductibles, it typically means you’re less likely to use the insurance; otherwise, you just pay out of pocket, and the insurance companies reflect that in terms of lower premiums.
So, take a look at your property and car insurance to see if you can increase deductibles or change the frequency of how you make payments. That alone can usually free up a couple of hundred per year.

(13:12)
Next step I’d go with is to look at where your assets are sitting. Emergency funds sitting in big banks these days aren’t doing squat, and you’re really making them more money than they are giving you. So, what’s really good to use right now is something called high-yield savings accounts. Just like the same accounts I’m sure you already have, except these ones are typically online, they’re still FDIC-insured, there’s typically no minimums, there are no fees, they just pay a lot more money than what big banks pay.
To put that in perspective, the average bank right now pays .6% a year, which is like nothing. You go to a high-yield savings account, these things are paying somewhere between 4% and 5% now. As interest rates start to come down, which we’re expecting to happen this year, you can expect the high-yield savings accounts to also come down. So, maybe next year they might only pay 3%, but 3% is still going to be better than .6%. So, the sooner you can make that move, the sooner you can start earning interest on that money.

(14:10)
Next tip I would just say is to take some time to learn or get an idea of how taxes work and how they impact you because, at the end of the day, it’s not what you make, it’s what you keep, and we don’t want to give the IRS any tips. A common thing I’ve seen in the last four or five tax returns I’ve reviewed is that people are getting hit with underpayment penalties.
A lot of people don’t know this, but the IRS is just like us in terms of they like getting paid evenly—they don’t like it when we wait until April to pay them. So, if you owe a large chunk of money in a given year and wait until April to pay them, typically you get hit with an underpayment penalty.

(14:38)
Now, if you think about it, if you worked for your employer and instead of paying you at the end of the year, they said, “We’ll give it to you in April,” you wouldn’t probably be too happy with that. You’d probably say, “Hey, you owe me for the hassle of going four months without my pay.” The IRS does the same thing—they like getting paid evenly. So, when we wait too long to pay them, that’s when we get penalties.
In case you aren’t aware of it yet, the tax deadline is different from the tax filing deadline. So, April 15th—that’s the day you have to file your tax return—that’s not the day taxes are due. Your taxes are due January 16th. That’s when you’re supposed to have all your taxes paid up. Yeah, you can pay it after that, but that’s typically when you get hit with those penalties if you’re not at the Safe Harbor number.

(15:04)
And for reference, the Safe Harbor number is the number of taxes that you need to pay to the IRS in a certain year to avoid those underpayment penalties. That number is going to be based on what your tax liability was last year. So, if last year your line 11—how much the IRS actually kept from your taxes—let’s say it was $10,000, your Safe Harbor number for this year would either be $10,000 or $11,000, which is just 10% more if you made over $150,000 in the year.
So, knowing your Safe Harbor number is important for avoiding these underpayment penalties.

(16:06)
Now, the last tip I would say is really just to get started saving early and be consistent with it. I see too many people get started way too late—they’re so focused on having fun or paying down meaningless debt. They’re so focused on paying down their car loans, which are charging them 3% or 4%, or they’re worried about their mortgage rate being at 5% or 6%.
Honestly, those rates are not that bad. Yeah, they’re more than twice what they were a couple of years ago, but in the grand scheme of things, paying 6% is not going to kill you. What kills you is not putting money away for your retirement and missing out on those returns.

(16:38)
Case in point: In 2023, the S&P 500 Index returned 26%. So, if you didn’t put any money in that and instead said, “Oh no, no, no, I’m going to pay down my mortgage because it’s charging me 6%,” congratulations, you might have saved 6%, but you missed out on earning 26%.
And when you look at the way compound interest works over time, as your mortgage comes down, the amount of interest you’re paying slowly goes down, whereas when you’re saving money, it compounds every year, and it starts to build on itself.
So, you can be the person that does the 15-year mortgage, puts everything they can into it, so by the time you’re 45 or 50, you don’t have a mortgage anymore—that’s great—but now you have less time to make it up. And time in the market is so important. The person that stays in the market the longest is going to get more good years than people that are in there for just 10 or 15 years.

(17:37)
So, you want to be consistently saving into the market because you never know which year is going to be good and which year is going to be bad. And it could happen that while you have a mortgage, you can put more money away. If the market’s flat for five or six years or just down, then it’s not going to work out at all.
So, put money away first—pay yourself first—before you worry about paying down your other debt like that. Now, credit cards are a different story. They’re charging 25% interest—absolutely pay that off. But when you’re talking about low-interest, single-digit numbers, I wouldn’t be too overly concerned with paying them down if you’re not adequately putting enough money away.

(18:03)
Now, when it comes to “What do I select?” or “What do I invest in?” obviously it’s going to depend on your risk tolerance and stuff, but I took a big step in making it as easy as possible for you guys. So, we have our Plan 3, our DCP, and 403(b) investment advice systems out there. So, anytime anyone in Washington State can come on, you can subscribe to the plan, and you just basically let us know what account you need help with—whether it’s just Plan 3, just DCP, or both—and then you tell us what risk tolerance you want.
So, if you’re young, you’re probably going to be more on the aggressive side of things because you have more time in the market. If the money goes down by 50% tomorrow, you’re not retiring tomorrow, so you can probably wait out the storm. So, when you’re young, you can be aggressive with it. Our models will tell you exactly what to purchase inside of those accounts and when—which is the really cool part—when to make changes to them.

(19:03)
Now, we have strategic models, which are just kind of your buy-and-hold strategy. So, every quarter, you’ll get an update—you log in once, you put the trades in, and then forget about it for three months. Come back in, and we’ll tell you what changes to make. So, it’s very low time commitment in that aspect.
Then, if you want to be a little more hands-on, we have tactical models, which means more active trading. We basically track a couple of key indicators in the market, and when two out of the three flash red at us, we start to raise cash.

(19:30)
So, go back to 2022. Our tactical models flashed red in January, and we said, “Hey, go to cash,” and we recommended that people hold about 55% of their money in cash, which kind of seems crazy. But if you look at what happened in 2022, the market went down in January and February, continued all the way down until October when it bottomed out.
Now, our model said in September, “Deploy your cash back into the markets.” So, it timed it almost perfectly where the bottom was, and it’s been up ever since. So, that’s just tactical investing or trying to time the market. It doesn’t always work out, but that’s just one recent case where it actually did work out in our favor. They held half their cash, missed most of that 20% downturn, and were able to buy back in at the bottom and reap the rewards.

(20:00)
So, that’s tactical investing. You have both options, and you can switch between both of them inside of that model.
All right, if you want more information on that, the link is going to be in the show notes below. I’ll catch you all next week, and remember that your future depends on what you do today.

(20:28)
All right, before I sign off, just a real quick legal disclosure that we’re required to say as licensed fiduciary advisers. Remember that this podcast is designed for educational and entertainment purposes only. I don’t know you personally, therefore I cannot give you any personal advice, so please don’t take anything that we say on the show as being personal financial, legal, or tax advice.
If you want that kind of stuff, make sure you seek out a professional so they can help you with the strategies and investments that are right for you.

(20:56)
Also, please remember that despite the name of our show, we are in no way associated with Washington State or the Department of Retirement Systems or any other Washington employer. We’re a privately owned firm that specializes in working with Washington state employees, which is why we know so much about this stuff. So, remember, we don’t work for the state in any way, shape, or form, so please don’t confuse this as being an official representative of the state.
All right, that’s it for the legal stuff. I’ll catch you all next time.

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