Your views on money will change throughout your life. Your lifestyle will evolve, and your goals will change as your dreams do.
Taking that financial journey with a spouse can be fulfilling and bring you closer together. But it's not always easy, and pulling too hard in different directions can strain relationships or ruin them altogether.
If there's one conversation you should have with your spouse before retirement, it's about building your financial plan for the future. All good things start as dreams, but plans make them reality. Building your plan together will help you grow and prosper together instead of apart.
Here are some important topics to cover when you have that conversation.
Get a pulse on your finances
Maybe you're a young couple about to start a family. Or perhaps you met your spouse later in life and are preparing for retirement as newlyweds. Regardless of your situation, you need to evaluate where you are today before you can envision where you're going.
Start by creating a budget. List your monthly income and then your expenses. Budgeting helps you understand where your money is going. You'd be surprised how money leaks from your bank account. I've been there -- subscriptions you forget about, that snack or coffee you grab on the go, you name it. Plus, some couples keep separate bank accounts, so this is an excellent opportunity to get on the same page. The goal should be to fund a lifestyle that doesn't consume 100% of your monthly income. If you spend every dollar you make, there's nothing left to build for the future.
Next, estimate how much money you'll need to retire. A common rule is that you'll need 10 to 12 times your annual salary the year you retire. So, if you make $100,000 in your last working year, your retirement savings should be approximately $1 million to $1.2 million. Your age and personal situation could make this exercise harder, so don't hesitate to speak with a professional financial advisor if needed.
Image source: Getty Images.
Now, you're ready to create a retirement plan together. List your assets (property, 401(k), investment accounts, etc.) and debts. Figure out the gap between your current wealth and your retirement goal. Discuss how much you need to invest to reach your goal by the age you want. There are free tools online that can help calculate retirement savings. Consider whether paying off debts can free up cash flow in your budget. You don't necessarily need to focus on low-interest debt like a mortgage, but high-interest-rate debt like credit cards can derail a financial plan, so you should pay those off.
After that, it's as simple as meeting monthly to budget and stay accountable to your plan.
The importance of taking action
For most people, investing is an essential tool for retirement planning. Investing creates wealth because your returns compound as they grow. That means the longer you invest, the more powerful compounding becomes. You and your spouse must understand where you are on your financial timeline.
Putting off retirement savings to fund an excessive lifestyle can cost you.
Consider the financial decisions of two similar couples:
- Couple A starts from scratch and invests $1,000 monthly from age 35 to 65 (30 years). They average 8% annualized returns on their investments.
- Couple B does the same, except they wait five years to start. They invest $1,000 monthly from 40 to 65 (25 years) and average the same 8% returns.
Couple A will retire with $1.5 million, while Couple B will retire with $958,000.
Most people mistakenly assume they can easily make up their contributions later in life. They focus on what they forgo ($60,000 in this example), but fail to grasp the compounding they miss out on.
The reality is that delaying your financial plan for silly reasons costs far more than most people realize.
Enjoying the ride
Image source: Getty Images.
Lastly, strike the right balance in your financial plan.
Life is short, and you don't want to miss out on memories, friendships, and time with your spouse to scrimp and save for the perfect retirement. You don't want to retire without a financial safety net, but overcompensating in the other direction can be just as bad.
As long as your retirement savings are on track, you shouldn't shy away from spending money and having fun. Contrary to the expression, you can have your cake and eat it too.
