Retirement Planning Strategies for Dual-Income Families
Retirement planning is an intricate process that can include a number of estimations, calculations, and decisions. It can be tricky for one person alone. Things can seem more complicated when two people are involved. Most couples plan their finances together. A household with two incomes has more cash flowing in every month. This considerably helps to elevate the family's lifestyle. The more money all members earn, the more comfortable and financially adequate their life can be. However, an increased purchasing power also translates to more expenses. This can, in turn, increase non-essential expenses and debt. With more people earning, the decision-making is also split equally. When a single person earns, they can make most decisions on how the money is saved or spent. However, when both partners are earning, conversations around how the money is spent and where it is invested are doubled.
Financial planning for families with a dual income also brings as many suggestions, viewpoints, and habits into the equation. If one spouse has more expenses than the other or likes to spend more, the other one is likely to be affected. Likewise, if one spouse is a saver and sensible with money, the other may be able to benefit from this trait. The health expenses and healthcare needs of both spouses can also be critical factors governing their finances and future financial planning.
However, despite all these minor hassles, dual-income families hold an advantage over others. With both partners earning, the total earnings and savings can be easily enhanced, and these families can settle into retirement with a bigger nest egg. However, retirement planning has to be a collaborative effort where both partners are equally involved in all the stages, including evaluation, goal-setting, strategizing, implementation, review, and revisions. Consider consulting with a professional financial advisor who can advise you on suitable retirement planning strategies for families with a dual income.
This article covers some financial strategies for families with a dual income that can help.
One-income family vs two-income family retirement planning
Retirement planning for one-income and two-income families is similar in many ways, but there are also some key differences to consider. Firstly, in most cases, one-income families have to be more mindful of their expenses and budget to ensure they have enough money for retirement. Unless the single earner is a high-net-worth individual or earning remarkably well, these families are more likely to have less disposable income. They may also have to make sacrifices in order to save for retirement or live a more frugal life than others.
On the other hand, dual-income families may have a higher overall income and may be able to save more for retirement. However, they may have more expenses. They may have to balance work and family responsibilities, making saving for retirement more difficult. Parents may be spending more on hiring childcare services, and the everyday expenses on gas, clothing, dining out, entertainment, travel, etc., are also likely to be higher.
However, irrespective of these differences, both types of families should prioritize saving for retirement.
Retirement planning strategies for dual-income families
Dual-income financial strategies for families can differ based on the type of employment and income. For instance, both partners can be self-employed or salaried. In some cases, one partner may be salaried while the other could be running a business. Some people may also be working on a part-time basis.
Based on the type and source of your income and employment, you can use the following strategies:
1. Full-time salaried employees
Full-time salaried employees can enjoy a ton of advantages. They have access to regular income. Moreover, their income is consistent and does not differ each month. They also have workplace retirement accounts, as most employers offer 401ks. Here's how salaried employees can approach retirement planning:
- Make the most of your 401k: The 401k is a company-sponsored plan that lets you save for your future years over time. The contributions can be made systematically, and in small quantities, so it does not seem like a burden all at once. As of 2023, you can contribute $22,500 to a 401k in a year if you are under the age of 50. If you are aged 50 or over, you can make a catch-up contribution of $7,500 and contribute $30,000 in total. This gives dual-income families a chance to invest $22,500 + $22,500 = $45,000 or $30,000 + $30,000 = $60,000 in a year. Moreover, since these limits are adjusted to inflation every year, the chance to save more and be on pace with inflation can be helpful to avoid a shortfall later. 401k plans also offer employer matches. Employers usually match between 4% and 6% of the employee’s salary. If both spouses are able to get an employer match, their savings can increase further. For the tax year 2023, the total contribution limit for the employee and employer is capped at $66,000 or $73,500 with catch-up contributions. With two spouses, this adds up to $66,000 + $66,000 = $132,000 or $73,500 +$73,500 = $147,000. Families need to maximize their contributions and negotiate a high employer match when interviewing for a job to ensure they make the most of these limits. Additionally, it also helps to start early in life. The longer you save, the more money you have for retirement. Since 401ks are tax-advantaged accounts, you also have more years to save money on tax and further increase your savings.
Consider deferring your Social Security benefits:Dual-income families have the option to defer one spouse's Social Security benefits and increase their benefits check. If you delay claiming your benefit till the age of 70, you can substantially increase the value of your check and receive up to 132% more than the original check. Dual-income families can either delay both checks or claim one and delay the other. The choice can be made based on your other savings and needs. You can easily postpone the claim for a few years if you have enough.
2. Self-employed employees
Self-employed individuals have the liberty to work according to their schedules and preferences. They can choose when to work and how much to work. Moreover, their incomes are not necessarily capped. However, their incomes may also not be consistent. Some months may be more financially rewarding than others. Here's how self-employed employees can approach retirement planning:
- Self-employed or solo 401(k): Solo 401ks can be used by small-business owners who do not have employees other than their spouses. You can contribute to the account as both the employee and employer. The maximum contribution limits for 2023 are capped at $66,000, along with an additional catch-up contribution of $7,500 if you are 50 or older.
- Individual Retirement Account (IRA): An IRA is a retirement account similar to the 401k. However, it is not offered by an employer. Anybody can open an IRA on their own as long as they meet the income limits set by the Internal Revenue Service (IRS) for the concerned year. As of 2023, you can contribute $6,500 per annum if you are under the age of 50. For those aged 50 and above, there is an additional catch-up contribution of $1,000, bringing the total to $7,500. An IRA is a tax-advantaged account with traditional and Roth options. The traditional IRA allows you to make pre-tax contributions, and your withdrawals are taxed in retirement. On the other hand, a Roth IRA lets you make after-tax contributions, so your withdrawals are tax-free in retirement. You can choose any of these based on your needs. If both partners contribute to an IRA, they can save up to $6,500 + $6,500 = $13,000 per annum or $7,500 + $7,500 = $15,000 in a year. The IRA also offers options like the Simplified Employee Pension (SEP) and Savings Incentive Match Plan for Employees (SIMPLE) IRA. SEP IRA is for self-employed people running a business of any size, whereas the SIMPLE IRA is for companies with less than 100 employees. You can contribute up to 25% of your compensation or $66,000 for 2023, whichever is less, to a SEP IRA. Additionally, your annual contribution cannot exceed $15,500 for a SIMPLE IRA in 2023.
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3. Hybrid (full and part-time) employees
Hybrid income families can include families where one partner may be working full-time and the other part-time. In some cases, both partners may also be working part-time. Here's how they can approach retirement planning:
- Invest in workplace retirement accounts: Whichever partner has access to a company-sponsored retirement account must use it and maximize their contributions as explained above to ensure regular savings.
- Manage investment risk: When earning part-time, families have to be mindful of the risk they induce on their investment portfolios. Part-time jobs may provide relatively less money. They are also not permanent. Therefore, too much investment risk can be avoided to ensure capital protection.
- Keep an emergency fund: With inconsistent earnings, it is essential to maintain an emergency fund. An emergency fund must contain at least six to eight months of your expenses. This can be used when you are out of work.
Common tips for financial planning for families with a dual-income
Here are some common things that all kinds of individuals must adopt in a dual-income household:
Different people have different approaches to saving and investing money. However, the decisions of one partner can significantly affect the others. Therefore, it is essential to be clear about your likes, dislikes, habits, and future goals. Both partners must often communicate and offer clarity on their financial needs to avoid disagreements, overlapping, and shortages in financial planning.
2. Discuss debt:
One spouse's debt liabilities can affect the other and vice versa. Spouses may be vulnerable to creditors. One spouse's credit score can also impact the other in the case of joint loans and mortgages. A low credit score can come in the way of owning your home and several other significant milestones. Therefore, it is crucial to be aware of your spouse's spending habits, debt liabilities, and creditors at all times.
3. Establish roles:
Financial planning for families with a dual income can be confusing at times. If your parts are not clear, you can find it difficult to establish responsibility and accountability. This can lead to unfulfilled goals, unnecessary spending, and general discontentment. Therefore, assign specific duties to each partner. For instance, one partner can cover essential expenses, such as rent, gas, groceries, etc., while the other can contribute to a 529 education savings plan or pay debt installments. Partners can also fix a percentage of their income for savings and expenses. For instance, each partner can contribute 20% of their salary towards future savings, 30% towards expenses, and the remaining 50% for their individual use. This method can be better to ensure equality, considering the two partners are likely to earn different amounts of income.
4. Hire a financial advisor:
A financial advisor can be vital for dual-income families as they often have a higher income and more complex financial situations. A financial advisor can create a comprehensive financial plan that takes into account their unique needs and goals, such as saving for retirement, paying for their children's education, and managing debt. Additionally, a financial advisor can assist with investment strategies, insurance options, and tax planning, which can help the family make the most of their income and achieve financial stability and security. A financial advisor can help dual-income families make smart financial decisions, stay on track to reach their goals, and feel confident about their financial future.
Retirement planning strategies for dual-income families can be challenging, but with the right approach, it can be achievable. Dual-income families must create a comprehensive financial plan based on their unique needs and goals. The plan should include strategies for saving for retirement, paying for their children's education, managing debt, and investing for the future to ensure complete financial protection. It is also essential for dual-income families to consider insurance, healthcare, tax planning, estate planning, and more to ensure financial security in retirement. With careful planning and the help of a financial advisor, dual-income families can achieve their retirement goals and enjoy a comfortable and secure retirement.
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For more retirement planning strategies suited for dual income families, visit Dash Investments or email me directly at firstname.lastname@example.org.
About Dash Investments
Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.
Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. In addition, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.
CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.