what do you think of this advice?

[deca]

We went to see a financial planner recently, mainly to discuss retirement saving strategies. There's a 12-year age gap between me and DH and so I feel uncertain about whether we should prioritize saving for him or for me -- the age of the account holder is a major factor on when one can or must begin taking withdrawals. There's not a lot of information addressing this issue and frankly the FP we saw was no real help either.

But he did say something else that surprised me a little. We have a lot of equity in our home, so he recommended applying for a HELOC and just having that open credit available, in lieu of a large e-fund. Now he wasn't saying don't have an e-fund at all. He was just saying keep 5-10K in liquid savings rather than 20-30K. And put the rest of the money we're able to save/invest into a vehicle that will get higher earnings. It sort of made sense, although it seems like you're accepting a little more risk. Basically his POV was that having a 20-30K level emergency is uncommon, and that money could be working harder for you somewhere else besides a savings account, but the HELOC gives you some backup should the worst actually happen.

Just wondering what folks here think of that advice.

[disneysteve]

I think that is interesting advice. I'd agree that having a 30K emergency is rare. Also, consider that even a prolonged period of unemployment wouldn't require you to come up with all that money at one time. I'd see nothing wrong with keeping a smaller EF as long as there are other resources to draw on over time if the need arose. For example, I have various taxable investments - stocks, mutual funds, bonds, CD - that I could gradually sell off to raise money as needed. If truly necessary, I could even withdraw contributions to our Roth accounts without penalty. Given a diverse portfolio like that, a large cash reserve really isn't all that necessary.

What do I think about depending on a HELOC as your EF? I think that depends on your situation and prevailing interest rates. If rates are low, it could make sense as the cost of borrowing against your home might be low relative to what your investments are earning. Why pull money out of mutual funds earning 10% if you can borrow money at 7%?

[Scanner]

Yes, I agree with his advice but I will predicate it one thing:

It depends on your risk tolerance.

If I were to put my finger to the wind here, I would say the majority here are conservative.

If that's the case with you, then forget having the open HELOC and just have an emergency fund.

I beleive Suze Orman recommends the same thing as your planner.

[Scanner]

the age of the account holder is a major factor on when one can or must begin taking withdrawals. There's not a lot of information addressing this issue and frankly the FP we saw was no real help either.

That's a shame because that's what a financial planner is supposed to for - anyone can construct a portfolio. He should be talking with you about your life issues. But alas, I feel that's the problem - many of them are just mutual fund salesmen.

Let me take a stab at it as my parents are about 9 years apart in age.

I personally don't think it matters who's funded first too much but if you were to set a priority, I would say the oldest and here's why - there are only so many years you get to take advantage of the tax shield before it shuts down and then you have to withdraw. So, as you age, your choices get fewer.

Of course, your account will tend to grow the most as you will have more time on your side to effect compounding.

[jIM_Ohio]

Originally Posted by deca

We went to see a financial planner recently, mainly to discuss retirement saving strategies. There's a 12-year age gap between me and DH and so I feel uncertain about whether we should prioritize saving for him or for me -- the age of the account holder is a major factor on when one can or must begin taking withdrawals. There's not a lot of information addressing this issue and frankly the FP we saw was no real help either.

But he did say something else that surprised me a little. We have a lot of equity in our home, so he recommended applying for a HELOC and just having that open credit available, in lieu of a large e-fund. Now he wasn't saying don't have an e-fund at all. He was just saying keep 5-10K in liquid savings rather than 20-30K. And put the rest of the money we're able to save/invest into a vehicle that will get higher earnings. It sort of made sense, although it seems like you're accepting a little more risk. Basically his POV was that having a 20-30K level emergency is uncommon, and that money could be working harder for you somewhere else besides a savings account, but the HELOC gives you some backup should the worst actually happen.

Just wondering what folks here think of that advice.

I'd say 3 months expenses, 10k minimum in EF, HELOC to cover rest, assuming it can cover a 30k medical bill.

But that is a SWAG at best.

The age issue is complex.

32 and 20 is a different problem than 42 and 30 which is different than 62 and 50.

The younger both of you are, the less it matters.
If you can max both IRAs for both spouses, it does not matter as much either.
If one of you makes more than the other (significant difference) this also affects solution.
If there is a high amount already saved, that also affects my thoughts.

If the older spouse makes more than the younger one, the older one needs to have more invested.
If the younger spouse makes more than the older one, who has the money invested is less of an issue.
If there is already a large amount invested for retirement, then I would want to discuss RMD's for older spouse relative to that spouses income.

If you are both young, split investing 50-50, possibly just tweaking investment mix of each spouse to suit time horizon.

[My English Castle]

I'd love to see more on how the relative ages of partners affect both Social Secuirty withdrawals and 401k and IRA funding.

I remember seeing something in the last few days about women delaying their Social Security and men taking theirs asap because of the actuarial probabilities of long life.

[deca]

Originally Posted by My English Castle

I remember seeing something in the last few days about women delaying their Social Security and men taking theirs asap because of the actuarial probabilities of long life.

Yes, exactly -- just going by our age gap and average longevity, I expect to outlive my spouse by probably 20 years. That's pretty depressing and I don't like to think about it, but it points to a need to strategize for things like SS and IRA withdrawals.

We are 33 and 45. I am the younger but significantly higher-earning spouse. DH is an entrepreneur. I hope to see a time where he is raking in money, but currently his income is on the low side (maybe about 30K for 2007). I also already have some 401k and IRA accounts, while he has virtually nothing.

We don't have enough available funds to max out retirement accounts for both of us. From my POV the best long-term strategy is to prioritize tax-deferred accounts in my name, and to have DH withdraw SS beginning as soon as he can do so without penalty (age 67?). When he is 70, I will only be 58 and presumably still well able to work if we still need the income -- I'd rather be earning the income we need at that age than be forced to start drawing down retirement funds we saved in DH's name. That money could sit and earn interest for another 10 years and still be there for me, after DH is possibly already gone.l

If I were DH however, an investment scenario that put everything in my younger spouse's name wouldn't seem quite like looking after my own interests. He leaves it all up to me but I want to do what's fair. I don't think we will ever split up, but then most people don't expect that, right? I just don't think the "fairest" strategy for one individual is necessarily the most financially prudent strategy for us as a couple.

[jIM_Ohio]

Originally Posted by deca

Yes, exactly -- just going by our age gap and average longevity, I expect to outlive my spouse by probably 20 years. That's pretty depressing and I don't like to think about it, but it points to a need to strategize for things like SS and IRA withdrawals.

We are 33 and 45. I am the younger but significantly higher-earning spouse. DH is an entrepreneur. I hope to see a time where he is raking in money, but currently his income is on the low side (maybe about 30K for 2007). I also already have some 401k and IRA accounts, while he has virtually nothing.

We don't have enough available funds to max out retirement accounts for both of us. From my POV the best long-term strategy is to prioritize tax-deferred accounts in my name, and to have DH withdraw SS beginning as soon as he can do so without penalty (age 67?). When he is 70, I will only be 58 and presumably still well able to work if we still need the income -- I'd rather be earning the income we need at that age than be forced to start drawing down retirement funds we saved in DH's name. That money could sit and earn interest for another 10 years and still be there for me, after DH is possibly already gone.l

If I were DH however, an investment scenario that put everything in my younger spouse's name wouldn't seem quite like looking after my own interests. He leaves it all up to me but I want to do what's fair. I don't think we will ever split up, but then most people don't expect that, right? I just don't think the "fairest" strategy for one individual is necessarily the most financially prudent strategy for us as a couple.

Your situation is not dire. Because you earn significantly more and are younger, you have many things going for you.

Here is what I would do:

Any 401k or traditional accounts in your husband's name should be minimized. Get the match, but use your name for most long term investments. The purpose of this is to avoid RMD's when your husband reaches retirement age. Avoiding RMD's allows you to withdraw what you need without getting hit with excess taxes.

If you can fund a Roth for your husband (being older), I would fully fund this. If he dies, I believe account keeps it's Roth status when you inherit it.

So for older spouse making less money, get a 401k match, maximize the roth... and use as much of his income to live off of as possible.

In your case, your income is probably taxed at a higher rate than his (based on paycheck). This neglects self employment taxes, so follow up with an accountant (to see) if this is really true.

In your case, defer taxes on income. 401k- traditional. Max it. You will have RMD's, but they will happen 12 years past your husband's first RMD and in that 12 years you could fine tune the plan.

I would set some goals:

1) if your husband's 30k income is consistent, this is the #1 goal to replace for 12 years (assuming he retires 12 years before you). Taking SS early in this case is a good idea, IMO. Then hopefully a 401k in his name would provide the balance of income from the 30k. If your husband could set aside 360k (30k*12 years), this would be most he would need set aside in his name.

2) a longer term goal is for you to replace between 50-150% of your current (higher) income. Roth accounts are the best way to do this, IMO... while 401k's defer taxes now, they will give you the highest tax bill later. So selling out to a 401k is not a good idea, IMO.

3) Do what makes sense, not what is fair. A 12 year age difference gives you some advantages... you will learn how one half lives while retired. Most people work one day, retire the next, entering a huge unknown. Use the one spouse retiring first method to plan a proper retirement.


Then as I type this... I realize if YOU, as the younger, higher earning spouse, want to retire EARLY, it is better to have as much assets in your husband's 401k type accounts as possible.

It's clear you need to set goals (retire early, probable retirement ages for each, retirement lifestyle desired).

To give max flexibility make sure you have money in 3 types of accounts:

401k/ tax deferred
Roth IRA/ Roth 401k
taxable accounts

this will allow you freedom to change the plan going forward.

[Scanner]

Complicated for sure. . .so not only is this a "numbers" problem but there is the "control" issue that comes with finances.

I would say that as the breadwinner you have a right to fund your account first and his second.

However, as you note, when you are married, all assets are both yours anyway.

Should there ever be a divorce, all assets get put on the table to be divied up, unless there was a specific pre-nuptial agreement to the contrary.

My Roth IRA has more money in it because it was funded early when I worked for a year and a half while my DW stayed home. So I had compounding on my side. It has also just performed stellarly (<---- a real word???). Then she went to work and has a good pension. It's all ours even though the Roth is in my name. I'm sure by now her Roth + non-vested Pension is worth more than "my" business + my Roth. (it's really our business but she's minimally involved).

I guess what happens in the case of divorce is when you are divying up your assets, you assess a value and tend to not touch sheltered accounts so the both of you don't incur a penalty. So, your house would be sold and maybe more of the proceeds would go to him.

I guess in the end it doesn't matter - just do what you feel comfortable with as the money is the both of yours.

It's so hard to talk about, isn't it? It's easier to talk about it with complete strangers on the internet than your own spouse sometimes. That's why I commented it's such a shame your financial planner didn't step up to the plate and give a commentary and offer leadership.

[Scanner]

I like Jim's advice (as usual): Perhaps just having all kinds of different accounts, so you can be flexible.

You won't max them out but you'll have choices down the road.

[LivingAlmostLarge]

Depends but I don't keep a huge EF most of it is invested in the market. That way I can liquidate it as needed. And if the market is doing well then I'd use the HELOC I have open. If it's doing poorly then I have less money.

Honestly what's the difference between an EF and a taxable account? Anything? If you lost your job for 1 year would you really not be using your taxable accounts? Especially if you only had a 6 month EF?

[disneysteve]

Originally Posted by LivingAlmostLarge

Honestly what's the difference between an EF and a taxable account?

Liquidity and principal safety mainly. If you have money in a high-yield money market, you know your principal is safe. If, instead, you have that same money in a a taxable stock mutual fund, your principal is variable.

There are also tax issues. Every time you sell shares of stock/mutual funds, it is a taxable transaction. Drawing money from your money market account is not a taxable transaction (although the interest earned annually is taxable) so there is a simplicity factor.