It’s hard to argue against the fact that everyone needs a financial plan. Not having one is like being on a life-long road trip without a map or a spare tire – unprepared for the inevitable.
It’s hard to argue against the fact that everyone needs a financial plan. Not having one is like being on a life-long road trip without a map or a spare tire – unprepared for the inevitable. Whether you prefer to manage your own finances or hire a trusted advisor, financial planning allows you to live life with intentionality, avoid catastrophe, and reduce stress by having an answer for life’s “What if?” scenarios.
Everyone has their own unique financial situation that will make their path, and thus their plan, different. However, LGBTQ+ individuals, couples, and families face unique challenges and opportunities that others do not. Even with marriage equality, some gay couples I know prefer to remain unmarried, (and there is nothing wrong with that), and our relationships can have significant age gaps. These dynamics have estate planning, social security, and retirement planning implications. Gays also live unique lifestyles compared to traditional couples and families. We generally like to travel more, we usually don’t have kids, and we are more likely to live in dual-income households. These factors create opportunities to build wealth much quicker than single-income households with kids.
Financial planning is the roadmap for your unique journey, and it all starts with an honest assessment of your current financial landscape. Like any traveler, understanding where you are now helps determine the best route forward.
Take a deep dive into your income and expenses. Understand where your money is coming from and where it’s going. Before you can set goals, it’s important to understand your fixed and variable expenses, and how much you have left over for savings each month. You might hear this referred to as “cash flow”, but it’s just a fancy word for budgeting.
Lay out your assets and liabilities. Knowing what you own and owe forms the foundation of your financial plan. Assets include checking and savings accounts, retirement accounts, real estate, cash value life insurance and business equity. Subtract any debts including mortgages, credit card balances, personal & student loans, etc. to calculate your net worth. Household Net Worth is a great metric to track over time to gauge your progress towards your goals.
Define achievable milestones that align with your values and desired outcomes. These could range from saving for a dream vacation to planning for retirement.
Prioritize these goals based on their urgency and significance. For example, the first goal should be to build an emergency fund with 3-6 months’ worth of living expenses (fixed & variable). The idea behind this rule of thumb is that in the event of a job loss, you’ll have easy to access cash to cover bills while you look for your next job. For dual-income households, as many LGBTQ+ relationships are, 3-months’ worth is okay. For single-income households, 6-months’ worth is a safer cushion. This money should ideally be in an FDIC-insured money market savings account, and not invested in stocks, bonds or mutual funds which have the potential to lose value.
After building your emergency fund, set a goal to pay off any high-interest debt such as credit cards. Getting these paid off will substantial increase your ability to build wealth without the drag of interest payments.
From here, longer-term goals can be assessed. These goals are generally a few years down the line and involve a recurring contribution to investment accounts. Saving for a down payment on a home purchase, starting a business, and planning for retirement all fall in this category. These goals will generally require the use of a compound interest calculator to determine your initial investment, monthly or annual contribution, time horizon and expected investment return.
In the world of financial planning, legal and relationship considerations are the compass guiding your decisions. For LGBTQ+ individuals and couples, understanding and navigating these aspects are crucial.
Recognize the legal nuances affecting LGBTQ+ couples, especially in your domicile state. Whether married or not, estate planning is paramount for ensuring your assets are handled according to your wishes.
Work with professionals well-versed in LGBTQ+ estate planning to make sure they have your best interest at heart. Must-have estate documents for gay couples include a last will and testament, a durable power of attorney, medical power of attorney or living will, and in some cases, a trust. All of these ensure that your finances are handled according to your wishes should you become incapacitated or pass away.
It is not uncommon for gay men to have previous relationships and children with an ex-partner. This dynamic may warrant working with an estate planning attorney to establish a trust to ensure assets are distributed as you wish (especially for unmarried couples) and not left up to the probate process, which can have a drastically different outcome.
In the financial landscape, taxes are the toll booths on the highway of wealth. For LGBTQ+ individuals and couples, navigating these toll booths requires a nuanced understanding of the tax implications unique to their situation.
Recognize the impact of your relationship status on tax filing. Married or not, your choices can influence your tax benefits. For high net worth couples, being married definitely has its advantages. Namely, transferring assets to one another is not considered a taxable gift and does not affect the lifetime gift exclusion amount. Upon death, retirement accounts inherited by spouses can be rolled into the spouses name, which can bypass required distributions that non-spouse beneficiaries have. These are just 2 examples that can keep more of your money in your pocket rather than the IRS’s.
Leverage tax-advantaged accounts like IRAs, 401(k)s, and HSAs to optimize your savings. All of these accounts allow for deductible contributions, reducing taxable income for the year. After, or in addition to, maximizing these tax-advantaged accounts, there are still tax-saving opportunities available in general investment accounts (also known as taxable brokerage accounts). Since capital gains, dividends, and interest are taxed as they are incurred in these accounts unlike in retirement accounts, it’s best to utilize tax-efficient investments like exchange-traded funds (ETFs). ETFs are like mutual funds in that they are diversified “baskets” of hundreds of different stocks, but they are generally more passive in nature. This means little to no taxable capital gains distributions than mutual funds.
Tax-loss harvesting is another strategy available in taxable brokerage accounts that involves purposely selling an investment at a loss to reap the tax benefit. A capital loss can offset any gains that would normally increase taxable income, and even reduce your ordinary income by up to $3,000 per year. Any unused losses carry forward to future tax years indefinitely.
Retirement is the primary financial goal many people have, and achieving a comfortable one involves meticulous planning. LGBTQ+ individuals often face unique considerations when charting their course toward retirement. As stated earlier, lifestyles of same-sex couples differ drastically from opposite-sex couples. This includes retirement!
To get a rough estimate of how much you need to retire, you can use the 4% rule. The basis of this rule is that you can expect to withdraw about 4% of your retirement account balances each year without running out of money before you die. There are a few assumptions that we’ll get into in another post, but that’s the gist of it. For example, if you expect to need about $70,000 per year to live your desired retirement, and you will get $30,000 from social security, you’ll need about $1,000,000 saved to account for the other $40,000. (1,000,000 x .04 = 40,000). Note that this is just a starting point, as retirement spending changes over the years and sometimes your 4% is not enough, sometimes it’s plenty.
Planning out your ideal retirement goes beyond how much you want/need to spend to support your lifestyle, though. It involves determining what you want to retire to rather than just what you want to retire from. In other words, when people think about retirement, they often focus on the fact that they won’t need to work anymore, but not exactly what they will do with all the free time. Over a 40 year career it’s not surprising that many of us allow work to become our identity. To live a happy post-work life, it takes a lot of thought and consideration to detach your identity from your work and figure out how you’ll keep your mind and body busy.
It is not uncommon for gay couples to have a significant age gap in the relationship. A 10+ year difference in age begs the question: Can both spouses retire at the same time? Of course, that’s every couple’s ideal retirement, but the younger spouse may not be able to draw from their retirement accounts without a tax penalty. In these cases, it may help to work with a financial advisor who can create a strategy to support your desired lifestyle without overpaying in taxes. Social security and pension benefits also look a bit different for couples with an age gap as they are based on joint life expectancy. Social security can be claimed as early as 62 or as late as 70, and over the rest of your life can result in 6-figure differences in total paid-out benefits. SSA.gov has several calculators and tools anyone can use to estimate their payments and start devising a plan for claiming social security.
Like landmarks on your financial journey, investments shape the scenery of your wealth-building expedition. LGBTQ+ individuals, often leading distinctive lifestyles, have unique considerations when devising investment strategies.
Financial goals can have varying time horizons and accompanying levels of risk that can be taken to achieve them. For example, a 30-year-old saving for retirement at age 60 can usually afford to take a high level of risk with their investments allocated towards this goal, in hopes of achieving higher returns over time. Saving for a down payment for a home purchase in 3 years has a much different risk profile. Over short periods of time, investment returns are less predictable and can have higher likelihood of losses than long timeframes.
Beyond investments, there are different account types that are suitable for different goals as well. Retirement accounts have tax advantages that allow investors to defer income taxes on interest, dividends, and capital gains inside the account until later (or even eliminate these taxes all together). The downside is that if accessed before age 59 ½, withdrawals from these accounts can come with penalties.
General investing accounts, often referred to as “Taxable brokerage accounts”, “after-tax accounts”, or “non-retirement accounts” have their own tax quirks as well. In fact, their tax advantages are almost the opposite of retirement accounts – while interest, dividends, and capital gains are taxed in the year they occur, there are no penalties for withdrawing funds at any age. Investments held longer than a year in these accounts get taxed at preferential long-term capital gains tax rates, which are typically lower than income tax rates. So, as you can see, it’s just as important to save in the correct type of account as it is to make sure you’re taking the appropriate level of risk to reach each of your goals.
Align your investments with your values by exploring socially responsible investing (SRI).
Consider environmental, social, and governance (ESG) factors when making investment decisions, contributing to a more sustainable and ethical financial future.
Regulations and laws around taxes, retirement accounts, estate planning, and investments are ever-changing. Stay up to date by subscribing to newsletters from reputable sources. Most of these updates come in the fourth quarter as income limitations, contribution limits and the likes are updated for the following calendar year.
Your local LGBTQ+ Chamber of Commerce may be a good place to connect with like-minded people and stay abreast of local changes that may flow through to your personal and financial life.
Engage with reputable LGBTQ+-focused financial resources to stay updated on financial trends, legal changes, and community-specific insights.
Attend workshops and events tailored to LGBTQ+ financial education to enhance your financial literacy.
Build a financial support network by seeking advice from professionals well-versed in LGBTQ+ financial matters.
Leverage community resources and support groups to share experiences and insights, creating a collaborative approach to financial planning.
As you navigate the twists and turns of your financial journey, remember that every decision shapes the path ahead. The unique challenges and opportunities faced by LGBTQ+ individuals and couples underscore the importance of intentional financial planning. By assessing your finances, understanding legal and relationship dynamics, optimizing tax efficiency, preparing for retirement, crafting thoughtful investment strategies, and staying informed, you can build a resilient and rewarding financial future. This journey is not just about reaching a destination but about creating a life that reflects your values, dreams, and the unique richness of the LGBTQ+ community. Safe travels on your financial adventure!
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