Financial Planning for Couples
Getting married involves financial commitments, so get them right to ensure a harmonious life journey together.
Different stages of life
Here are some findings from a survey conducted by the American Institute of CPAs.
More than half of couples argue over unexpected expenses
More than one-third of couples fight over insufficient savings
Couples aged 45 to 54 argue an average of 4 times a month about finances
As you can see, money worries can be a strain on a relationship. Hence, sound financial planning and good money management is integral to a successful and harmonious marriage.
There are several key milestones in life that one typically goes through.
From being single to becoming married. After that, a home purchase would be on the cards. Subsequently, a couple would most probably have a child, or several. Eventually, one would retire after the children grow up and become independent.
Throughout each of these major milestones, financial planning plays an important role in addressing the unique financial concerns that each situation presents.
Let’s look at each stage of life in detail:
When a couple decides to get married, there is also a financial commitment to one another. This commitment is often not expressed explicitly, as pre-nuptial agreements are not too common here.
Most family units work on a dual-income basis today. Should one half of the couple were to lose his/her income stream, due to circumstances such as death or disability, the financial stability of the family is greatly compromised.
Medical expenses incurred when one becomes seriously ill also becomes a drain on a family’s finances. Not to mention the additional living costs associated with a major illness due to lifestyle adjustments such as hiring a private nurse or special transportation arrangements.
To mitigate the above risks, a family would require cash to cover the unexpected expenses. Cash is most readily available through various insurance such as life/term, disability, critical and hospitalisation policies.
When one is legally married, his/her Wills or Nominations (CPF and insurance) would also become void. Hence it is important to review the asset distribution arrangements. Estate planning is a key priority to ensure that all the necessary arrangements are done properly, to the wishes of the individual.
Buying a home
A property purchase would place a couple several hundred thousands of dollars, if not millions, in debt.
Should one party passes away, the mountain of debt would be passed on to the surviving spouse, who would have to bear the obligation alone.
In the event that the surviving spouse’s income is unable to justify for the current loan quantum. In such a situation, the bank may require a lump sum payment to bring down the outstanding loan amount to a quantum within the surviving spouse’s income level. If the surviving spouse is not working (e.g. housewife), the bank might not even grant the loan.
On another note, in the event of one being disabled and unable to work, the bank would still expect the monthly loan repayments to be made. Failing which, they would have the right to repossess the property.
Hence, it is critical that the couple have cash to clear off the outstanding loan, whether there be a death or disability of one of the joint owner.
Mortgage insurance is the most effective way to mitigate this risk. Mortgage insurance pays a lump sum to the surviving spouse so that he/she can pay off the outstanding amount owing to the bank. In the event of disability, it can also provide monthly payouts to settle the loan repayments.
Having a child
Prior to giving birth to a baby, many parents I meet are concerned about the unexpected medical cost associated with pregnancy complications or baby’s congenital conditions (medical conditions that are present from birth).
Should a baby be born premature, there may be even more costs involved due to the need for neonatal ICU care and incubation.
It is also a concern for many parents that their child is unable to purchase life insurance at normal coverage or premiums should the baby be diagnosed with medical conditions at birth.
Innovative policies such as Prudential's PruFirstGift seeks to address the above concerns by providing some financial relief in the event of the above. PruFirstGift also allows a life insurance plan to be purchased for the child even before he/she is born, with no medical underwriting and guaranteed coverage. The catch is that this plan must be purchased within 18 to 32 weeks of pregnancy.
After the baby is born, the next important milestone would be when the child is one month old. This is because only at one month old, parents can purchase other insurance plans for him/her.
One of the most important coverage to put in place is the baby’s hospitalisation insurance. I have done many medical claims for babies and even causes such as fever or persistent coughing could require hospitalisation.
Another area that parents can look into is starting the first life insurance policy for their child as a gift of love. An ideal plan to achieve this would be a whole-of-life insurance plan with returns, with premiums payable for a limited period of time (e.g.15 years, 25 years, etc). When the child grows up, the policy could be passed on to him/her, without the need for any further premium payment. Beside providing insurance coverage, the plan also have immediate cash savings which can be tapped on if the need arises.
Education funding is close to the heart of many parents. As seen from the table above, a business degree is projected to cost over $110k in 20 years’ time. Most young couples do not have a large initial capital to go into investments such as the stock market or investment property. Hence they have to break down their saving and investing into small bite-size pieces, saving a couple of hundred dollars monthly. It is important to start early or risk having insufficient funds to send a child to university.
After the children is all grown up and fully independent, the next milestone in life is retirement.
Despite most couples being of different age, when it comes to retirement, it would be ideal to retire at the same time. This will help make retirement a more enjoyable event and both husband and wife can take this opportunity to travel together or pursue their favourite activities.
This means that one’s retirement age is not fixed at 65 or 62. It should be a mutually agreeable point in time that works for the couple.
Singaporeans are facing tremendous challenges when it comes to accumulating for retirement. Cost of living has been rising higher than average over the last 5 years, yet income has not increased by the same magnitude. Property prices have been skyrocketing and this means new couples will find it tougher to own their homes. COE is at all-time highs and new parents who need a car because of the baby will not have much surplus cash after paying for al these costs.
Nevertheless, time waits for no man. Age will catch up with us whether or not we like it. Therefore accumulating for retirement is still a must, despite the financial challenges that couples face. We can no longer depend on our children to pay for our retirement - they will probably have financial worries on their own. Therefore it is inevitable that we take control of our retirement planning and learn how to grow our savings through investing.
Once again, it is important that retirement savings start as early as possible. The earlier one starts, the more time he/she would have to save up, and the lesser he/she would need to set aside regularly.
Assume a couple ages 30, and planning to retire at 65. They require $3,000 monthly to pay for their lifestyle, including a bit of traveling and enjoyment.
By age 65, they would require a retirement fund size of about $3 million (in future dollars, inflation at 4%).
It seems like a huge amount, but trust me when I say that in 25 years time, $3 million is nothing much really. To put the ‘time value of money’ in perspective, 25 years ago you wouldn’t have expected that COE would cost a house’s price, wouldn’t you?
If this couple start saving and investing at 6% p.a. now, they only need to set aside about $27k per person per year, or $2,300 per month. Therefore it is not an impossible task, though it does take some effort and compromise.
Monthly investment plans such as the PruSelect Vantage helps tremendously in accumulating for retirement at a good investment rate of return. Such plans ensure a disciplined savings and investment approach, and is supported by active management of investments for those who have no time to do their own investing.
Financial planning - accompanying you through life
As you can see, as we go through different stages in our life, financial planning is essential to ensure that money is well managed and problems are kept at bay. Happy finances can lead to a happy family life. We, as financial planners, spend our time planning for you, so that you can spend your time on your loved ones.
By Cai Junhao, AFC, AEPP, DipFP, DipBF
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