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Two Portfolios, One Retirement

One Retirement, Two Portfolios

As any happily married couple will attest, harmony is important in matters of love and money—and the same holds true for retirement planning.

These days, it’s likely that you and your spouse both have careers, which means you’re managing two individual retirement portfolios. But separate investing strategies can make it tough to achieve the ultimate goal of a shared retirement. So how do you manage your combined investments so that your long-term plan unfolds as seamlessly as possible?

While the investing particulars of every marriage may differ, a few principles apply to all. The following points will help you and your spouse better coordinate your goals—and your asset allocations.

Start the conversation and align retirement goals

Are you talking to your spouse about retirement? You may be—and you may think you agree on the big picture. But the devil lies in the details, as they say. For example, a couple might profess a desire to travel in retirement. But when pressed for details, one spouse might envision buying an RV and driving cross-country, while the other spouse might be more interested in staying in resorts.

To avoid these issues, start talking early, and discuss your long-term desires in detail so that your retirement vision can evolve together.

Manage your asset allocation—together

As you shape the plan for where you’re headed, the next step is aligning your investing strategies so that you get there.

First, it’s likely that you and your spouse have different risk tolerances, which have influenced your investment ideas and asset allocation thus far. Now it’s time to focus on asset location—meaning, which investments belong in which account.

For example, you could place tax-efficient assets (such as municipal bonds) in taxable accounts and leave less efficient assets, like real estate investment trusts (REITs), in tax-advantaged retirement accounts in order to maximize the after-tax benefits. Or, if one partner has relatively limited investing options through a 401(k) while the other has more varied choices, the partner with greater flexibility might take on a greater proportion of harder-to-access asset classes.

Let’s look at a hypothetical example of how this might work. Consider John, 65, and Elena, 60. John is ready to retire within the year; Elena would like to work for another five years. The combined value of their 401(k)s and IRAs is $1.4 million. They’d like to stay in their Chicago home, which has no mortgage, and take at least two trips a year (to vacation and visit family).

John’s portfolio has become increasingly conservative over time. He now has 90% of his allocation in bonds and bond funds and 10% in equities, because he wants a more stable portfolio as he looks toward imminent retirement.

But Elena has a similar allocation in her portfolio, and that pronounced conservative allocation could keep them from reaching their goals, observes Anthony Davidow, Asset Allocation Strategist at the Schwab Center for Financial Research. “With fixed income yields at generationally low levels, this couple will need to get more income from their investments in order to enjoy the lifestyle they envision,” he says.

Based on the couple’s stage in life and their desire to travel, Anthony suggests a more balanced portfolio. The couple’s total equity allocation could comprise 28% of their combined portfolios—5% in income-producing global REITs and master limited partnerships (MLPs), and another 23% in international and U.S. large-cap stocks that pay dividends.

Chart 1: Sample portfolio for a retired couple

The balance of the portfolios should be allocated to fixed income (62%) and cash (10%). Of the bond holdings, Anthony says around 15% could be invested in international, high-yield and emerging market bonds.

Should Elena take all of the extra equity exposure in her portfolio, or should she and John split the difference? That’s up to the couple to decide, just as their final choice of assets will depend on their tolerance for risk. “The greater point is to view your individual retirement accounts as part of a larger whole, and manage them accordingly,” Anthony says.

Reexamine your holdings, investing expenses and diversification

In addition to reviewing your asset allocations together, it’s important to look at the specific securities in your accounts, some of which you may have chosen years ago. Now is the time to make sure your assets are well-diversified and expenses are low.

Take the hypothetical case of Miguel and Amy. They’re both in their mid-40s with two teenagers; the couple has at least 20 years until retirement. Amy has a 401(k) worth $230,000, invested equally in a U.S. large-cap index fund and a U.S. bond index fund. Miguel opted to invest in his company’s target-date fund some years ago. And while he’s saved $225,000, the fund has an expense ratio of 1.0%. Both of them have some flexibility in terms of changing their allocations.

Given their ages—and the fact that they have two college-bound kids—Amy and Miguel could be open to taking on more risk. Anthony feels they can afford to do so, but they should also focus on diversification. Depending on the investments available to them, Anthony recommends a 45/46 split between equities and fixed income. They could divide their equity holdings between U.S., international and emerging market stocks—both small and large. And they should also consider commodities and global REITs for some protection against inflation.

Chart 2: Sample portfolio for a couple with teenage children

Additionally, Miguel might want to consider working with a financial professional to develop his own asset allocation—a complicated proposition, given that the goal is to replace his target-date fund and cut his expenses. But cutting expenses can help improve the couple’s overall returns during the next two decades.

Whatever your retirement portfolios look like now, the underlying idea here is to start with your joint vision, and extend that to your portfolios. It is important to periodically revisit your asset allocation and risk tolerance, and determine whether adjustments need to be made along the way. By viewing your assets as a whole, you can coordinate your investment strategy so that it serves your ultimate goal—a happy and financially healthy retirement.

1 Gopi Shah Goda, John B. Shoven, and Sita Nataraj Slavov, “Does Widowhood Explain Gender Differences in Out-of-Pocket Medical Spending Among the Elderly?” Journal of Health Economics 32, no. 3 (May 2013).

Thinking About Survivorship

Although wives are statistically more likely than husbands to outlive their spouse, it’s a good idea for men and women alike to think about survivorship.

Consider the following tips as you work through your retirement plan.

Plan for higher medical costs: A recent study found that elderly women incur higher out-of-pocket medical expenses than men, and that becoming a widow could increase those expenses by as much as 24%.1 Purchasing additional long-term-care insurance now could help cover increases in medical expenses down the road.

Check your life insurance coverage: If one spouse dies, will the other be able to cover all expenses? Business owners, parents with disabled or minor children, and people who will lose a substantial portion of the family income should make sure they’re properly insured, even in retirement.

Know your Social Security options: Figuring out the best time to file for Social Security benefits is always tricky, and it’s no easier when trying to factor in survivor benefits. However, if the higher-earning spouse delays benefits beyond full retirement age, the surviving spouse will be entitled to the increased benefits that result from the delay.­­

Even if you and your spouse are about the same age and are in good health, thinking about these scenarios now can help you create a more complete and comfortable plan that will support you both throughout retirement.

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Important disclosures:

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Performance may be affected by risks associated with non-diversification, including investments in specific countries or sectors. Additional risks may also include, but are not limited to, investments in foreign securities, especially emerging markets, real estate investment trusts (REITs), fixed income, small capitalization securities and commodities. Each individual investor should consider these risks carefully before investing in a particular security or strategy.

Past performance is no guarantee of future results.

Diversification and asset allocation strategies do not ensure a profit and cannot protect against losses in a declining market.

Stocks that pay dividends are not guaranteed and may reduce or stop paying dividends.

Master limited partnerships are considered pass-through entities for tax purposes and therefore have special tax considerations.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

©2016 Charles Schwab & Co., Inc. All rights reserved. Member SIPC.


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