Complex planning needs for more complex relationships
Today, approximately 100 million people in the U.S. are members of a blended family.1 What was once a novel plot device for the 1970s and 1980s television sitcoms is now everyday life for nearly one in every three Americans who are living as a step-parent or step-child.
Along with the many emotional changes that can accompany a newly blended family, husbands and wives should also be aware of some of the more common financial challenges that often arise. Particularly during the first few years, blended families need to be particularly mindful of monitoring monthly income and expenses. Higher grocery bills, multiple cars and insurance payments, a larger home with a larger mortgage, and possible alimony and child support obligations – these can all take a monumental toll not just on meeting your immediate financial needs, but on the health and well-being of your long-term retirement savings.
As a result, it’s important for you and your new spouse to communicate early and often about your financial values and your relationship with money in an effort to ensure that you are both on the same page. It’s not at all uncommon for two people entering a relationship to have remarkably similar views on a host of subjects from child rearing to politics, yet have diametrically opposite approaches to saving and spending. Not only does this create a likely imbalance in the assets and credit history each party is bringing to the table, but it also presents a huge obstacle to effective long-term financial planning.
An open and honest conversation
You owe it to your future to sit down with your partner and have a frank discussion about each of your relationships with money, and to look for common ground wherever you encounter distinctly different values or behaviors. If one of you is a saver and one a spender, see if you can both compromise enough to come up with a spending, saving, and investing plan that you both can adhere to. If one of you has been diligently saving for your child’s education while the other has saved little or nothing for their child, see if you can devise a strategy for moving forward to help equalize things a bit more in the future. While potentially uncomfortable, conversations like these can avoid a great deal of conflict down the road.
In the short-term, you’ll probably want to explore building a bigger emergency fund to help weather any unexpected financial upheaval. The greater financial obligations associated with supporting a blended family mean that the loss of a job or sudden illness could have an even more profound impact than before. Make sure you also talk to your accountant about the potential impact your new family may have on your tax status. Don’t wait until April 15th to suddenly find out that a child you assumed was a dependent is no longer considered one, or that your child support payments are not deductible.
Longer-term, you should review your life insurance coverage and beneficiary designations. Do you need to increase the amount of coverage given the change to your family situation? Is your ex-spouse still listed as the primary beneficiary of insurance policies and/or your workplace retirement account and IRAs? Keep in mind that no matter what your will might bequeath, ultimately it’s your beneficiary designations that will determine who will inherit these assets.
Whether you decide to comingle all of your assets and liabilities, or keep finances separated into his, hers, and ours buckets, the most important thing is to work together and continually communicate. As your financial advisor, we can help you address these and a host of other blended family financial challenges such as estate planning, education planning, and retirement planning.
1 Pew Research Center, Social and Demographic Trends, December 2015