Friday, April 20, 2007

Love in a Time of Financial Planning, Part Deux

In our preceding blog, we explained the value of compounding your investment returns to make your net worth grow in ever-increasing amounts. We pointed out that if you love compounding, compounding will love you. In this blog, we will discuss another aspect of love in the world of financial planning: namely, love.

If you stay together with your significant other, the two of you will have much more financial strength than you'd have separately. Very few people have storybook lives, in which they work for 40 years straight with ever rising incomes and then collect the gold retirement watch on their way to a Gold Coast penthouse apartment. Most people have ups and downs, periods of employment and periods of unemployment. During their working years, two people together can support and help each other. If one becomes unemployed or ill, the other can support the household until the first recovers and resumes working. As the two of them of ride through the ups and downs of life together, they stay on a much more even financial keel than they would separately.

The same remains true in retirement. Consider this example: each of you is eligible to collect $15,000 from Social Security and has $250,000 saved up in retirement and other accounts. We'll assume that neither of you has a pension (which is increasingly the case). A conventional financial rule of thumb is that, if you retire around 65 and want to make your savings last for the remainder of your life, you can spend 4% of your savings per year, adjusting annually for inflation. Thus, each of you would be able to withdraw $10,000 from your savings the first year of your retirement. Add that to your $15,000 from Social Security and you'd have $25,000 apiece. If you're living alone, that's enough to be okay, but not more. If you are together, you'd have a combined income of $50,000, enough to be solidly middle class (except maybe in a few high cost cities on the East and West Coasts).

The idea of staying together for financial reasons conjures up images from yesteryear of bedraggled housewives economically locked into loveless marriages with slovenly loutish pigs who never tucked in their shirts, drank cheap beer by the case, watched TV all day, filled their homes with the acrid smoke of nickel cigars, and demanded to be served from dawn til dusk. That's not what we're talking about. In some instances, no relationship is better than a bad relationship, regardless of the financial impact. And a relationship based only on money isn't likely to last. But you have a lot of reasons to make your special relationship work, and increased financial strength is one of them. Much of love involves sharing and giving, and love in a time of financial planning benefits both of you.

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