By Peter Mastrantuono
Paradoxically, married couples with two earners are often less prepared for retirement than married couples with one earner or single workers. According to The Center for Retirement Research at Boston College, this is a result of three factors: dual earners receive lower Social Security benefits relative to their household earnings, two-earner couples tend to under save, and the impact of divorce.
To improve retirement preparedness married couples need to first create a retirement plan that calculates a target savings goal that will support a desired retirement lifestyle and then coordinate their contribution and investment decisions between their respective retirement plans.
Coordinating Retirement Plan Decisions
For dual income married couples there are three key areas on which to coordinate decisions:
Manage Contribution Levels: 401(k) plans may be quite different between the two spouses’ employers. For example, one plan may offer a 100% match for the first 10% of contributions, while the other may match only 50% on the first 5% of contributions. If a married couple simply decides to place 7% of each of their individual salary into their respective 401(k) plans, they will be losing out on a significant opportunity to grow retirement wealth.
In this example, a couple can contribute the same overall amount of income, while building greater wealth by having the spouse with the better match contribute 10% of his or her salary and the other spouse reduce his or her 401(k) contribution accordingly. They can still take home the same after-tax, post-401(k) income, while benefiting from increased employer contributions on the additional 3% contribution made in the better matching 401(k) plan.
Diversification Across Plans: Spouses’ contributions are typically invested independent of one another, missing out on opportunities to coordinate overall diversification to enhance long-term returns.
Here’s an example of how that might work. Suppose each spouse, based on risk tolerance and investment objective, gets similar exposures to large cap stocks (e.g., 30%) and small cap stocks (e.g., 10%). Normally, each spouse would then allocate his or her contributions to the best available large cap and small cap investment options in their respective plans.
What if, however, the husband’s 401(k) has a superior large cap investment option, while the wife’s 401(k) has a better performing small cap option? In such a case it might make sense for the husband to invest more in the large cap fund (equal to his and his wife’s large cap allocation dollar amount), while the wife invests more in the small cap fund (equal to her and her husband’s small cap allocation dollar amount). In this way, their dollars are allocated to better performing funds, but with the potential to build greater savings with the same level of contributions and at no additional risk.
Diversify by Plan Type: Because it’s difficult to predict what future tax laws will look like, many planners suggest considering diversifying retirement plan contributions between the traditional option (pre-tax contribution/taxable withdrawals) and a Roth option (after-tax contributions/tax-free withdrawals). Accordingly, couple may want to consider how to allocate their contributions between these two plan choices.
These decisions can be complex, but with the help of an experienced financial advisor, individuals can build greater long-term wealth without assuming greater investment risk.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.