The Most Overlooked Financial Planning Tool for Newlyweds
For decades, prenuptial agreements have been painted in a purely negative light. If mentioned before getting married, it can sound as if you are preparing for the marriage to fail before walking down the aisle.
As a result, prenups have almost exclusively been associated with celebrities, professional athletes, and wealthy families attempting to protect their enormous fortune from a future spouse who is on unequal financial footing. But in recent years, couples are growing more receptive to the idea of prenuptial agreements, and that raises the question of whether they should simply be seen as an extension of a well-crafted financial plan.
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To be fair, not every couple needs a prenuptial agreement, in the same way that not everyone needs a Roth IRA or permanent life insurance. That does not, however, make any of those more traditional financial planning tools any less necessary to consider when building a financial plan. It simply means their usefulness depends on the person that the plan is being constructed for, as well as their individual circumstances.
One of the most common misconceptions about prenuptial agreements is that signing one somehow introduces financial rules into a marriage that otherwise would not exist. Since property acquired, income earned, and debts incurred during the marriage can all become relevant if the marriage ends, getting married already creates legal and financial agreements between both parties.
Much like with estate planning, the absence of a formal written plan does not mean you have chosen to avoid creating rules that will govern a future outcome. Rather, it means that you have made an active decision to allow the state where you reside make the decision for you.
Viewed through that lens, a prenup begins to look less like a prediction about whether a marriage will survive and more like another form of contingency planning. The goal is not to assume that something will go wrong but rather establish expectations while both people are in a position to make thoughtful decisions together.
This is especially true in an instance where one spouse may choose to exit the workforce for an extended period to focus their efforts on raising children. While a prenuptial agreement cannot spell out what may happen in terms of financial support for any future children, it could at least address the potential lost wages the “stay-at-home” parent may assume.
That sacrifice can extend far beyond the paychecks they surrender in real time. Years spent outside the workforce can also mean missed retirement contributions, slower future wage growth, forfeited stock compensation, and fewer opportunities for promotion. A well-constructed agreement can help both spouses acknowledge that economic tradeoff in advance rather than waiting until potential separation to dispute what those years at home were worth.
For an engaged couple, the value of a prenuptial agreement may have less to do with preparing for divorce and more to do with creating clarity before their finances become more intertwined. By the time they get engaged, they are likely already making decisions about where to live, whether to combine bank accounts, how much to save for retirement, whether to buy a home together, and how they plan to divide household responsibilities. A prenup can simply become one more part of that broader financial conversation.
After all, the purpose of a well-crafted financial plan is not simply to maximize investment returns or save enough for retirement. It is also to identify the financial events capable of materially impacting someone's life and to determine whether and how to address those risks before they ever have a chance to materialize.
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Malcolm Ethridge is the Managing Partner at Capital Area Planning Group, based in Washington, D.C. His areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits.
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Disclosures:
The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your tax and legal advisors before taking any action that could have tax and legal consequences.
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