When it comes to financial priorities as a couple, things can get a little sticky. This is true of retirement funding, as well as in other areas that concern money. That’s why many couples avoid the subject altogether. They just do their own thing when it comes to retirement savings. They set their own savings rate, pick their own investments in their own respective 401k accounts. Some couples even have separate taxable investments. However, it’s easy to see how this can be sub-optimal — especially when most partners usually don’t have similar earnings throughout their career. So what are the alternatives? How should you and your partner go about funding your retirement accounts?
Equal Funding of Retirement Accounts
The first thought that comes to mind about retirement savings is to just fund each account equally. This is also the default option if you try to maximize your retirement savings. Retirement accounts aren’t held jointly — each partner can have their own account. So if you both have an IRA, you can put $6,000 (limit for 2021) in each account. That’s a total of $12,000 a year.
Contributing equally will provide each of you with your own retirement assets. You can also take them with you if you ever separate. (Of course, that is also why some people are wary of funding someone else’s IRA account.) It can also help you as a couple if you are able to contribute up to the limit, since it will boost your household’s overall retirement portfolio.
Taking Care of Everyone — No Matter Their Income
Another great thing about just splitting IRA contributions evenly is that a stay-at-home parent can still have a retirement account. It’s possible for a working spouse to make a contribution on behalf of a non-working spouse. This can provide the non-working spouse with peace of mind, even as it helps your household with its overall retirement contributions.
If you both have access to 401(k) or other retirement plans through work, making equal contributions there could add another $19,500 in retirement savings each. Along with the IRAs, that’s over $50,000 in savings a year for the pair of you. Of course, not many couples find themselves able to contribute the maximum allowed every year. Don’t worry if you’re in that boat too. Just save as much as you reasonably can into those tax advantaged retirement accounts.
When Does It Make Sense to Fund Retirement Accounts Unequally?
There are some cases where it doesn’t make sense to fund retirement accounts equally. If you can only save a little bit every year, it makes sense to get the best bang for your buck. For example, make sure you are maxing out any funds that your company matches into your 401(k). Let’s say you and your partner can afford to contribute $5,000 a year to various retirement accounts. Now further assume that your employer offers a match up to $2,000 of your contributions, but your partner’s employer offers a match up to $4,000. In this case, it would make the most sense financially to contribute more to your partner’s account. Go ahead and get your own maximum match. After that, though, it makes more sense to work on earning that $4000 of matching funds your partner is eligible for.
Another case where you should consider splitting the savings unequally is if one spouse’s 401(k) plan offers objectively better investment options than the other. If you can’t contribute enough to max out both accounts, consider which one might be the better deal. This can happen if both companies offer a S&P 500 index fund, but one of the options is just cheaper.
Yes, the balances will be unequal in this case. The difference will become wider over time. However, the reality is that it still makes sense to sock away as much as you can as a household. If you are really concerned about what would happen to those uneven assets in the case of divorce, you can create a post-nuptial agreement. Yes, it’s almost the same as a pre-nuptial agreement. It will specify how a partner with more retirement contributions will make up for the increased assets in the event of a divorce.
Dealing With Potential Inequalities
It could also make sense to fund retirement accounts unequally when one of you might end up with higher earning power down the road. This is likely to be the case with certain types of IRA arrangements, especially the Roth IRA, that limit the ability to contribute based on household income. Here’s a personal example with some folks I know.
My friend has a husband who is entering law school. She describes their retirement contributions as follows:
“My husband was a paralegal and he is moonlighting to get a law degree. Assuming things go as planned, he will have the potential to contribute extensively to his retirement fund once he graduates and pass the bar exam. His income in the future will likely prevent me from having an IRA though. So, right now I am being selfish and putting my retirement needs first. We are maxing out my own IRA every year even though we haven’t added to his.”
This is an interesting take that reflects changing circumstances. It may warrant another change in upcoming years. The math works the same for the couple no matter whose account gets funded. However, funding the wife’s IRA first and then the husband quickly catching up later when he’s making the big bucks gives the family some peace of mind. Sometimes, psychological benefits are just as important as financial ones. I see no problems with their plan, as long as they stay together. (The topic of dealing with finances during a divorce is a whole different article. Multiple articles, really.)
The Bottom Line
At the end of the day, it’s always important to plan for the future. Since it’s unlikely that you and your partner will always make the same amount of money or have the same employer matching perks, it makes sense for you to consider all the angles. Should you fund your retirements equally? Should you fund certain accounts more than others, to make use of any free money contributed on your behalf? Are there other factors in play, like my friend who’s husband is currently in law school? Regardless of your situation, make sure you take the time to talk to your partner about the best options for you both.