Traditionally, many married couples combined finances and managed their money and other assets jointly. Today, some couples do that, but it is not uncommon for married or partnered couples to manage some or all of their finances separately. They may split payments down the middle, decide who pays which bills, or contribute to a joint household account while maintaining their own individual spending and savings accounts. They may even have their own separate financial advisors.
But it is important for couples to recognize that at least some financial planning should be done together. It is also important that both people are well informed of the overall state of the household finances; so even if things are managed separately, neither party should be left in the dark.
Planning to be single again
When you’re in a happy relationship, nobody wants to think about being single again, but you should always be prepared in case something happens.
Women are especially vulnerable when they fail to plan. The reality is, 90% of women will be responsible for their own finances later in life due to divorce, widowhood, or never having married at all. And, 4 out of 5 people who have survived their spouse are women. So whether you are living with a partner or married, you are putting yourself at risk by not having critical conversations about your financial affairs.
Should the relationship end or if one person dies, you can easily find yourself in a vulnerable position. Firstly, if you haven’t been having conversations about your combined financials along the way, suddenly having to figure out your partner’s finances can be an exceptional stress during an already emotionally trying time and you are at risk for discovering significant negative financial surprises. Secondly, if you are the second holder of credit related accounts, you may not realize you are not building your own credit — leaving you unable to buy a home or even rent an apartment as a single person. Also, the amount of debt you qualify for as a couple is different from what you qualify for on your own. If something happens to your spouse, you may lose access to the credit or accounts you rely on.
What would you do if your spouse suddenly walked out or died? Unfortunately, you can’t prevent either event from happening and far too many people are left shocked and in financial trouble when it does. Being prepared for worst-case scenarios isn’t cynical, it’s smart — don’t assume it can’t happen to you.
Planning for Retirement as a Couple
Many couples manage their finances separately during working years, but you should be planning for retirement as a unit. At retirement, whether you have enough or not will have to do with what you both have accumulated and what you both spend. You might think you will handle retirement expenses as you have all along, but you need to be confident that your spouse has saved enough too.
You should also talk over your vision for your retirement lifestyle and how you’ll spend your time and money, because you could have vastly different ideas. Your plan has to protect you both together and as individuals.
In Canada, your largest expense is often your tax bill. With retirement comes a great tax planning opportunity – the ability to pension income split! Pension income splitting applies not just to a specific pension income, but income from your respective RRIF (what your RRSP turns into for income payments) or other registered retirement income related accounts. Properly planning your income together can result in not just significant income tax savings, but can also make the difference between both of you receiving all of your government benefits versus having your old age security (OAS) clawed back at what is effectively an extra 15% tax. Planning your retirement together gives you peace of mind that you’ve accumulated enough for a reliable lifelong income and assures you’ve planned for a tax-efficient retirement.
No matter how independent you are, it is important to come together and plan appropriately for all possible scenarios as a couple to protect yourself and each other.