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Couples And Money- Work Together To Make The Most Of Your Money (Part 4)

June 18, 2014

“How can we even think about investing when we have such a big mortgage to pay off?” asks Andy, rather exasperated. investingtogether“Doesn’t it make more sense to focus on the mortgage first?” Andy and Sarah are right to consider the mortgage their first priority. But wait; there’s more.

Last week, the couple learned ways to improve their credit and pay off their mortgage faster (read post here).

Both in their mid-thirties, Andy and Sarah have good jobs and have been with their companies for 4 and 10 years respectively. Sarah loves her job and has progressed to increasingly senior positions and salary levels. Andy has recently become disillusioned with his job and is debating a career switch; a big decision that needs further study. Both are fortunate to have company retirement plans but know very little about them.

“Honestly, retirement isn’t even on our radar screen” says Sarah. Most young couples I work with feel this way and I don’t blame them. However, it pays to take time to understand the plans you participate in. Being knowledgeable about your chosen investments and strategies can make a big difference to your wealth over your working life.

We dive into the details of Andy and Sarah’s plans. The good news is that both have opted to participate in these plans since they began employment. Andy has wisely contributed the maximum each year to his company RRSP plan and has therefore maximized the company match he’s entitled to. Andy is uncomfortable with risk and has chosen to have his contributions invested in GIC’s earning very low interest rates. Andy tells me he has no intention of dipping into these funds until retirement, 25-30 years from now. He’s happy to let his contributions sit and grow until then.

Vaguely, Sarah remembers wading through her company savings and retirement plans 10 years earlier when she was hired. At that time, she admits to being a bit overwhelmed and simply opting for the default choices offered by these plans. We discover that Sarah is also invested in very low risk, fixed income securities with a small component of equities. After review, Sarah learns that she is contributing less than the maximum and therefore missing out on a more lucrative company match than Andy’s plan offers. Sarah works for a large, international company that has been very successful and generous with it’s employees. She also realizes that she has never signed up for the company stock purchase plan. “Is this something I should consider?” she asks.

Taken together, the investments in Sarah and Andy’s retirement plans are very conservative for their age and time horizon. I explain that the majority of their investments earn returns that are barely keeping up to inflation with little chance of growth. By reducing their fixed income and increasing their equity investments, they can improve their combined wealth with little additional risk over the long run. Especially so, if they include high quality, profitable dividend-paying companies with strong, long-term prospects.

With regard to Sarah’s company’s stock purchase plan, together we determine the opportunity is too good to refuse. Not only does her company offer a 50% match, it allows share purchases at a 10% discount to market price. Sarah’s company has an excellent history of growing it’s current 3% dividend and share price over time. While there is no guarantee that past performance will continue, Sarah is comfortable with the risk involved. “Had I invested in this plan ten years ago, we would have had a far better down payment for our house” she exclaims.

Once you become “a couple”, it makes sense to think about a consolidated (rather than individual) investment strategy. Having complementary (not identical) investments in your retirement plans can actually reduce risk overall. A joint strategy to eliminate overlap and increase diversification improves your wealth as a couple.

Armed with some new knowledge and investment strategies for their retirement funds, Andy and Sarah are well on their way to a financially secure retirement.

 Next Week- Andy and Sarah learn tax-saving strategies



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