184 | Couples & Money: Planning for Wealth

 

Hilary Hendershott: Hey, profit boss. This is Hilary Hendershott, your host. Welcome to Profit Boss Radio. Today, I am wrapping up the Couples & Money series. I’ve had a great time with Arielle Ford and Susie Miller and Elle Martinez talking about how couples can produce financial harmony. And now today, I’m going to give you my best financial planner advice for how couples can make sure to get themselves on the right path financially. And so, less of the emotional stuff and relationship stuff and more of the qualitative planning stuff. So, there’s no intro for this episode because I’m it. I’m your keynote speaker. I’m the one. It’s just me. And if you want to know more about me, if you’ve just started listening to Profit Boss Radio, just click pause right now, go back to Episode 00. That’s the intro episode. And you can find out about me, why I launched the podcast, and who I am and why I’m qualified to give financial advice. So, I have divided the episode today into three sections. First is high-level strategic advice so kind of just guidelines and principles, second is steps for financial planning for couples and I have 13 of those, and third is money mistakes to avoid. So, what to do from a high level or what to do from a punch list level, and then mistakes to avoid. Alright, let’s get going. 

 

[HIGH-LEVEL STRATEGIC ADVICE]

 

Hilary Hendershott: First, strategic advice. I highly recommend that you as a couple set up money dates or money meetings. I did have a guest. It was Nicole Walters who and I can’t remember exactly what she calls her family money meetings but it’s like The Walter’s Family Financial Domination Summit or something really interesting. They invite their children and they talk about budgeting and trade-offs and planning for the future. And it’s just really important to have these on a regular basis. You’re going to work out in the beginning, work out the details of how you get along about money. I think you should have them bi-monthly or maybe monthly, and it can just be 20 or 30 minutes but I definitely recommend those money dates. My husband and I do them every other Sunday evening. 

 

Second piece of high-level strategic advice, ultimately, money is business. That’s all it is. It doesn’t have any innate emotional qualities or traits. If you decide not to pay for the kids to go to grad school, even though you’d love to, but if you do that, it means sacrificing your own retirement savings. It does not mean that you don’t love the kids and it does not mean that you don’t value education and it does not mean that you are selfish. Money is just business and you should relate to it like business. I will give you another example of a fallacy I see lots of couples falling into. People come to me. So, this happened a lot during the real estate crisis and people would say to me, “You know, I’m $250,000 underwater on my house, so I owe more than it’s worth.” And they would say, “I am a person of integrity and I will preserve my credit score at all costs, and I can’t justify not paying off this loan.” Now, look, am I saying walk away from all bad debt? No, I’m not. I think that it would behoove you to build the skill to pay off the debt. But in this case, for example, money is just business means that I promise you if that bank CEO was in debt to you, and paying you off meant that the bank was going to go out of business, he or she would default on his or her debt to you, I promise you. And those banks work defaults into their interest rates. They know some people are going to default. It’s just business, right? So, don’t make the mistake of getting emotional about your money, your credit score, your real estate, like that. Treat it like a business. If you know something’s not working out, avoid the sunk cost fallacy and walk away. 

 

Third piece of high-level strategic advice, know that the marriage contract is actually also a business contract, and it really can serve as protection for you in the case of death, injury, illness, or divorce. So, I’m a fan of the marriage contract because it helps you contract for financial outcomes that you probably will not or cannot foresee or pre-contract for. So, couples who choose not to get married are also entering into a financial partnership that is not pre-contracted. You can get yourself into big, big, trouble this way. For example, I recommend, if you’re going to live together, a cohabitation agreement. If there are assets involved, if you have high income or if there’s income disparity, or if in any way there are assets to lose, I recommend that you see an attorney and have a cohabitation agreement drafted. Well, first of all, I do not think you should buy real estate together before you’re married. I’ve written about this a lot. I think it’s a big mistake. The only way that works out is if you get married and live happily ever after. And as you know, statistically speaking, it’s just unlikely that that’s going to be the case, right? Death, divorce, desertion, injury, illness, these things happen. Okay. So, if you do buy real estate together, you definitely need a real estate partnership contract. And these documents, the cohabitation agreement, the real estate partnership contract, they might be just as expensive as a cheap wedding but they are definitely worth it. You want to take your money seriously, take your financial future seriously. If you are intentional about creating financial freedom for yourself and achieving a retirement number, you will have assets that are worth protecting. And it’s important that you do that so don’t fly by the seat of your pants when it comes to building assets. 

 

[FINANCIAL PLANNING FOR COUPLES]

 

Hilary Hendershott: All right. Let’s get to the steps for financial planning for couples. Thirteen of them. Number one, know your household income rate. You are going to laugh but it’s very rare that I meet a couple who knows their household income rate. People just don’t know it. 

 

Second, know your household savings rate. How much are you putting into 401(k)s, IRAs, Roth, and after-tax savings accounts which are also called brokerage accounts, or can be called community property accounts? Know your household savings rate. 

 

Then know your spending rate. Now, there’s a reason I put “know your spending rate” after “know your savings rate.” I want you to determine your savings rate based on your wealth plan, which we’re going to get to. That’s actually step 9, but I want you to determine your savings rate and then have your spending rate be an outcrop of the savings rate. Many, many people do it the reverse. Remember that most people do not have an earning problem. Most people have a spending problem so you’re going to determine your savings rate and then let your spending rate flow from that and know what that is. 

 

Fourth, it sounds silly but know where your accounts are and know where the savings accounts are, know what the passwords are to get into your spouse’s 401(k). Definitely know the beneficiaries on those accounts, IRAs, 401(k)s, and Roth IRAs all have named beneficiaries. So, those are pretty easy to handle. You get to have a primary beneficiary and a contingent beneficiary. And after-tax accounts or brokerage accounts or community property accounts, those do not have named beneficiaries. However, one simple solution is you can make those what’s called a transfer on death account. So, that will allow you to name a beneficiary and avoid probate. There’s a little piece of advice for you. I do that for my clients. 

 

The fifth step to financial planning for couples, agree not to take on more debt. Those of you who have debt, it may be a big emotional issue for you, or maybe not big emotional, but it may be an issue for you. And I get it. I highly recommend the system of financial automation that I teach to get out of debt. I use it to pay off lots and lots and lots of debt and it scales infinitely. So, automation is absolutely going to work for you through your paying-off-debt years and then your building-up-assets years. I’ll put a training video on how to automate in the show notes for this episode. That’s at HilaryHendershott.com/16. So, if you want to check that training out, go ahead and go over the show notes now but, yeah, just agree not to take on more debt. The kind of debt successful people are allowed to have is collateralized debt, and that’s debt that’s attached to either business interests or assets that increase in value, in most cases is just real estate. Definitely, pay cash for cars. I have published a lot that I always pay cash for cars. 

 

Recently, my husband and I leased a Tesla. We leased a Tesla to the business and now this is kind of as a sidebar to this episode but, you know, I’m transparent. I want to tell you what’s real. So, we decided to lease a Tesla. It’s the first time I’ve ever leased a vehicle. Tesla configures their leases so that they are tax-deductible for business owners so that’s a big savings benefit. And I’m having a baby. Having a baby, probably kind of like a month from today. And I thought well, people who have cars and have kids, their cars tend to be a real mess. So, if I’m ever going to lease a car that I can just give back at the end of the three years, this is the right time and my husband and I don’t drive that much so the chance that we’ll go over the mileage is basically zero. And so, I have an electric vehicle for the first time and a lease for the first time. Now, we ran the numbers six and seven and eight different ways, so it makes sense for us but for the vast majority of people, you should pay cash for your cars. So, step five is agree not to take on more debt. 

 

Number six, agree that you are planning for the future. I know it’s hard to have those first talks about money but it gets easier as time goes on. And there’s like that process of, well, I just met you, we’re dating, I’m thinking about my own financial future to we’re integrating our lives and our love and now we’re going to plan for the future together. So, that’s kind of like a hybrid between the high-level strategic advice and the steps for financial planning but I do think it’s part of the process is to say, “We need to do this together.” 

 

Step number seven is decide how you’re going to get your financial advice. Please do not tell me that you’re going to rely on the internet for financial advice. If that’s you right now, I want you to go back and listen to Episode 11 of this podcast about how bad advice that’s offered on the internet generally is and how impossible it is to tell the difference between really good and solid advice and bad advice, and the really negative repercussions that some people especially women are suffering because it seems like we’re taking more and more of our financial advice from the internet. You don’t have to hire a financial advisor, although there is a lot of evidence that having a behavioral financial advisor can have a dramatic net positive impact on your life and often does. So, well-respected institutions like Investnet, Aon Hewitt, Vanguard, and Morningstar have all demonstrated through research and evidence that a phenomenon they call or most in my industry called behavioral alpha. So, behavioral you know what that means. Alpha in finance means outperforming the market or producing a net positive return vis-a-vis market returns. And that behavioral alpha comes from hiring a behavioral financial advisor and that alpha has been measured at probably 2% to 3% per year in returns in your portfolio. So, that’s huge. It likely means the difference of hundreds of thousands of dollars in compound returns over your lifetime. 

 

In other words, it is probable the evidence we have says that hiring a behavioral advisor who will keep you invested when you should stay invested, who will invest you the right way, and who will help you avoid making financial mistakes is going to pay for itself. It’s not a net cost. It’s a net value. And then especially in retirement, you absolutely need good advice, in my opinion, from a human being probably not a computer in order to prevent you from making mistakes, and also this very complex topic called producing retirement income like, “Here, I have this portfolio, Hilary. I’ve saved my nest egg. How the heck do I get that into my checking account, so I can pay my bills, and keep the nest egg growing?” And that’s what a financial advisor like me does, professionally expertly. And you don’t want to screw that up. You know, once you’ve stopped working, losing money is really catastrophic, okay, because you can’t replace it so you have to avoid that risk. You have other options for just simply investment management if you choose to go without an advisor and those are our lower costs than hiring a financial advisor but what you don’t get is that behavioral piece. 

 

And those are the robo-advisors, where you park your money, and they use computer models to invest it for you. I think that those solutions and providers, I think you will have a good investment experience. And so, decide what your plan is going to be as a couple. Let me go back and caveat what I said about you having a good investment experience with robo-advisors. You’ve got to trust the market. If you’re pulling in and out of your portfolio based on market events and what’s happening in Syria and what you think about the economy, you won’t have a positive investment experience no matter what. So, that’s one caveat. Okay. So, decide what your plan is going to be. 

 

Step number eight, a piece of this, and I do think it’s critical, is deciding whether you are active or passive investors. Some folks call it passive investing, market-based, or index investing and it’s like being Catholic or being Jewish. You cannot be both. Okay. You need to decide which side of the line that you’re on and if you don’t decide, your advisor will decide for you simply because you’ll hire someone for other reasons like whatever reasons you decide, and that person will do whatever they’re already doing. So, you need to decide what you’re aligned with. In my professional opinion, you should absolutely be a passive investor. There is at the time of this recording no evidence that active investing in the stock market will pay off for you. When I say the stock market, I mean, what’s called the efficient markets. So, the markets that are mark-to-market have lots of information published about them all the time, that are easy to trade in and out of like that. There are other kinds of markets that are inefficient and that’s like a graduate course in finance and investments. Okay. So, out of the scope of this podcast, good thing for you is that you likely should just be in the efficient market, the stock market that you know and love. 

 

And in my opinion, you should be an index investor. And this informs your investment manager choice, your financial advisor choice. That means you’re not working with Merrill Lynch or Edward Jones or Wells Fargo to do your investing because the value proposition at those large financial institutions, the brokers, is all about active investing. It’s a big deal. That’s why there is an industry of independent financial advisors and that’s why it matters. If you want more information on this, I have a free audio training called Investing with Freedom. You can download it in the show notes for this episode at HillaryHendershott.com. And you can just head over there and download the audio and check it out. Okay. So, that was step number eight. 

 

Step number nine, know your wealth plan. This is why I think you probably need some kind of professional financial advice. I want you to know your timeline based on your savings rate. You can do an estimated growth plan or what’s called a Monte Carlo simulation but you need to have some sense of where you’re heading financially. What does that savings rate you calculated in step number two that I recommended mean for you in the future? When can you expect to retire, with how much money, and what will that mean to you in terms of retirement income? That really is the critical information or the critical number you need to know is that retirement income. If you say, “Well, we’re saving until we have $2 million or $5 million in the bank,” that really is not going to hit home for you if you don’t understand that $2 million means about $60,000 to $100,000 a year in retirement income. That’s a big delta, big gap between $60,000 and $100,000 a year in retirement income. By the way, that’s in today’s dollars. It does not take inflation into account. And again, that’s an entirely separate episode on retirement income and how to calculate, how to generate retirement income, and what your investment philosophy means for your retirement income. But, you know, if you don’t know that that’s what that means, it’s not going to hit home for you and it’s not going to be valuable for you. So, you want to know your timeline and know what to expect from your investments and you want to have a plan B and a plan C. 

 

So, don’t plan to scrape by the hair on your chinny chin chin. Good financial planning after all is about the journey. It is not a destination. You never arrive there. Okay? Because once you achieve your financial freedom number or your retirement number, you have to preserve it. I do know someone who made millions and millions of dollars. He was one of the first employees at a very well-known Silicon Valley internet company that I’m sure you know. And he made $3 million or $4 million in the IPO. He retired himself in the late 1990s and he gave his money to a broker who gave him bad advice. And he in the crash and then in the financial crisis, so in the crash, he lost half and then in the financial crisis he lost another two-thirds and essentially he’s back to work now. And he’s back to work at a very low compensated job, a high sort of physical labor kind of a job because his skills are out-of-date. So, once you get to your destination, you have to now employ the tools of a wealth preserver. You need to be a good steward of your money. Okay. So, it is about the journey and not the destination so the practices of financial health never go out-of-date. 

 

Step number 10. If you have kids or if you are in some way counting on your spouse’s income or if your spouse is counting on your income, you need life insurance. Absolutely. If you don’t have life insurance and you have kids, I’m going to be a little harsh here, I question your forward-thinking. This is absolutely financially irresponsible if your child, if there aren’t other assets in play, if you don’t have family assets or historical legacy assets that will take care of your child, you need to make sure that child is going to be taken care of in the event of your early untimely death. Just a little example, if you are cohabitating, and maybe you’re engaged or you’re planning a wedding, but you can’t afford to stay in that house if something happens to your partner. You know, consider a $100,000 policy or a $250,000 policy so that if something happens, you don’t have to, A, deal with the death of the person you love and, B, move out of the place you live in immediately. So, think about these things. Think about ways that you can use insurance. You can use life insurance to somewhat soften the blow of the death of your loved one. I can’t even imagine the emotional repercussions but I do know from my professional role within people’s lives that when the emotional repercussions are compounded by financial repercussions, it devastates people. So, don’t do that to yourself. 

 

In my opinion, you only need term life. The whole life or universal life can be a good tool for estate planning. For folks who know that there will be an estate tax bill from Uncle Sam and their assets are illiquid so they have all their assets tied up in real estate or something like that, a whole life policy can mean that your heirs or beneficiaries can pay off the estate tax without having to liquidate your assets, which is probably very valued by them. However, whole and universal life policies, in my opinion, are sold to single healthy people or married healthy people, young, healthy people who have no assets like that to speak of that exceed $5 million in value, basically, because the insurance agent gets paid a high commission to sell the policy. And I may lose some insurance agents as listeners on the show and I hope that if you are listening, you can at least say rationally, “Yeah, I get it. I get that those policies are sold because there’s a commission at the tail.” And, no, the underlying investments in a whole life policy, which people talk about our pre-tax are crap investments. They get terrible rates of return. The insurance agent will often promise a high rate of return at the time of sale but then most people who buy those policies are surprised by how abysmal their returns are over time. And then they find out that those high estimated rates of return they saw before they bought the product were just an “estimate” that the company doesn’t hold themselves to that payment schedule in any way, shape, or form. 

 

I have yet to meet someone, now I’m getting a little off-topic, but I have yet to meet an investor or client who purchased a whole life policy or an annuity and was glad that they did it. These are just perfect examples of the kinds of things and products that unsuspecting investors, well-meaning investors like you, get involved in essentially because you trust a salesperson. So, you wouldn’t go to a doctor who got paid to prescribe you a particular drug who earned a commission for prescribing you this drug over that. You want the doctor to prescribe the best drug for you. And so, that’s why you hire an independent fiduciary advisor and not anyone else, not a life insurance company employee who calls himself a financial advisor and not someone who isn’t fee-only and that’s a big and powerful distinction. Alright, that was number 10. If you have kids, you need term life insurance. 

 

Number 11. If you own assets like real estate that have positive value, in my opinion, you should probably have a revocable living trust. This is estate planning. Contact an estate planning attorney near you to get this done, otherwise, assets will get probated. What that means is if something happens to you and your spouse, you get hit by a bus, all of your assets get probated. It’s a year-long process. It’s super expensive. The government takes half of your stuff. Financial advice is one area where you definitely do not want to go for discount services. I mean, I hope this is intuitive to you but I see people, and believe me, I’ve settled the states with clients. I see people who have purchased what we call trust mill, revocable living trust documents, and they’re cheap, and they do nothing. Okay. So, you want a revocable living trust from an estate planning attorney and I think it’s probably going to cost you $4,000 minimum, probably closer to $5,000 or $6,000. And why would you incur that cost? Well, because if something happens to you, your assets are probably going to get cut in half, your heirs are going to be really unhappy, and they’re not going to get the benefit of that legacy that you worked so hard to provide and invest for. So, the documents and attorney can help you with are the revocable living trust, the wills, durable power of attorney, healthcare power of attorney, and even guardianship designations. Okay. So, that’s an estate planning attorney. I don’t sell estate plans. I don’t sell life insurance. I have no horse in that race but I do think that you need those services. And in the case of life insurance, you need that product if you have someone who’s counting on your income. 

 

Step number 12. If you have children and you want to decide who will care for them, if you and your spouse get hit by a bus, and you don’t have an estate plan or estate planning attorney on your team yet, put it in writing and share it with your family openly, like lots of them. You want your family to know your plan. Talk about what you want for the care of your children publicly. 

 

Step number 13 and the final step in successful financial planning for couples is about the medical directive. Again, this is something that will be handled by your estate planning attorney if and when you hire one. But if you don’t, ask your healthcare provider if they have a standard medical directive that you can fill out to state your wishes. Obviously, again, I do think you should hire an estate planning attorney but I understand everyone doesn’t have the cash laying around right now for that but definitely put something in place. State your wishes. Who can make decisions on your behalf? What kind of care do you want? In the various kinds of outcomes, you know, do you want to be resuscitated? Do you want them to do everything they can for you? Are you willing to live in a vegetable state? I’m way out of my realm of expertise but this is an important document to put in place and have in your safe and in your financial planning documents. 

 

[MONEY MISTAKES TO AVOID]

 

Hilary Hendershott: Okay. I have one section left for you today and we are done. Money mistakes to avoid. Number one, keeping financial secrets from your spouse or partner. Don’t do it. Just don’t do it. It’s a big mistake. It comes out later or it hurts people. If you can’t be transparent with your spouse, is it you? Or is it him? Or is it her? Like what’s happening? Work out the relationship stuff. Don’t keep financial secrets. 

 

Number two, don’t buy real estate together before you get married. I made that point earlier and I think it’s a big mistake. 

 

Number three, this is kind of tricky, positive thinking in the face of evidence that it shouldn’t be so. This is a money mistake. Let me give you an example. I know a couple who seem to have taken every alternative investment route on the planet. They’ve taken advice from people they met at seminars from infomercials they saw online from salespeople. They just kept trying and they kept trying and they kept failing, frankly. Their results were abysmal. They weren’t measuring their returns. They were generally unhappy but they were so caught up in dealing with the mistakes of the past, they weren’t being analytical about evaluating new options and opportunities. So, I would say there was evidence in that case that they should have taken a different route. I would have loved to have seen them hire a fiduciary fee-only financial advisor sooner, but they’ve made some mistakes. So, another example of positive thinking in the face of evidence to the contrary is some people just don’t have a natural entrepreneurial skill and yet they find themselves in business, they’re generally solopreneurs, and they go on for years barely making ends meet and working themselves to the bone, workaholic hours, six, seven days a week, and they’re not clearing an income that justifies their efforts. Or they’re serial entrepreneurs and their business endeavors fail again and again and again. Look, at some point, you have to accept the evidence that the world is giving you, that the world is showing you. So, I think that you should pursue lucrative activities and get on your wealth-building plan. 

 

That’s my final money mistake to avoid. I hope you have enjoyed this episode. For a bullet point list of all the points I’ve covered today, go see my show notes at HilaryHendershott.com.