How Should Working Couples Approach 401(k)s?
How should working couples approach their retirement accounts? By scrutinizing the pros and cons of each, and then making a coordinated plan.
Sure they’re crunched for time, which can tempt them to over-simplify investment decisions. Beware compartmentalizing information to make the quick and easy move; look at all available resources, especially when making retirement decisions.
At our firm, we commonly meet a young family with two children and both parents working. Each parent’s employer may offer 401(k) retirement plans, and the parents may agree to save a certain percentage of earnings in each’s employer-sponsored account. Kudos to this pair.
Perhaps the couple even discussed whether each needs to make retirement contributions to Roth (not tax-deductible today but growing tax-free forever) or traditional (deductible today) accounts. Kudos again.
Too often, however, the couple’s conversation ends here. Retirement plans are dynamic — and differing — investing and saving tools.
Yes, the U.S. Department of Labor does create the rules governing 401(k)s and oversees changes to plan documents and necessary updates. And yes, the Internal Revenue Service stipulates your can contribute no more than $18,000 annually (up from $17,500 in 2014), with a catch-up contribution limit of $6,000 more if you’re 50 or older.
None of that means that all 401(k) plans work the same. Some offer employer’s matching contributions, automatic enrollment, varying administrative costs, and differing mixes of investments and timespans for vesting (meaning when you can take the money with you if you leave the company).
For instance, while 401(k)s can allow for loans, your plan might not have that provision; the same holds true for Roth individual retirement accounts.
Let’s look at a couple, Jack and Jill, who both earn $40,000 annually. They contribute 7% of their income to each of their employer’s retirement plans.
Jack’s plan matches $0.50 to each dollar he contributes, up to 6% of his income, but offers no provision to put any of his 401(k) plan holdings into a Roth-type account. His plan does include a great fixed-income offering as an investment option, although it lacks quality international equities.
Jill’s plan matches the same amount up to 4% of her annual income and has a Roth option. Her plan also allows for loans against a balance in the plan; Jack’s does not. Her plan’s investment options seem adequate in all asset classes.
While this example may seem simplistic, it clearly represents what we often see in couples’ workplace retirement plans. The clear and easy answer: Start coordinating saving efforts for the benefit of the couple.
Both Jack and Jill ought to contribute enough to get the employer match. Jack should also keep a larger percentage of his assets in the fixed-income account, presumably a great portfolio in terms of balancing return and risk.
The couple needs to allocate Jill’s contribution based on their comfort level and perhaps slightly decrease fixed-income holdings to offset the concentration in Jack’s plan. If electing to go with a Roth IRA, clearly they need to put the remaining dollars toward Jill’s plan.
Point is, while the savings are in individuals’ names, the ultimate objective remains the couple’s retirement. Surveys show that money ignites more couples’ arguments than any other cause. Save together and save smart.
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Written by Joseph “Big Joe” Clark, CFP. Joseph Clark is the managing partner of the Financial Enhancement Group LLC, an SEC Registered Investment Advisory firm in Indiana. He teaches financial planning at Purdue University and is the host of Consider This With Big Joe Clark, found on WQME and iTunes. He is a Registered Principal offering Securities and Registered Investment Advisory Services through World Equity Group Inc., member FINRA/SIPC. Big Joe can be reached at email@example.com or (765) 640-1524. Follow him on Twitter at @BigJoeClark and on Facebook at facebook.com/FinancialEnhancementGroup.
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