Talking about money can be hard - but in this case, it's worth it
There are challenges that come with being in a couple - and just so I don't anger my wife, let me clarify that I mean financial ones - but one of the greatest may be simply talking about money.
When it comes to retirement planning, however, communication is key to maximizing a household's 401(k) savings, as a brief by Taha Choukhmane and Cormac O'Dea published by the Center for Retirement Research at Boston College reminded me recently.
Defined-contribution plans, specifically the 401(k), have become the dominant form of retirement plan in the U.S., and employees with access to such plans must navigate a variety of choices. For the roughly half of workers whose plans do not automatically enroll them, they must first decide whether to participate or not. Then they must decide what to invest in and what share of their salary to contribute.
More than 80% of employers that sponsor 401(k) plans offer a match that often depends on the employee's contribution. So employees must choose a contribution that makes sense for their budget and that, to the extent possible, maximizes the match.
A famous study showed that individuals often fail in this allocation problem, literally leaving free money on the table.
The CRR brief looked at whether couples do the same thing. It turns out, not every couple takes advantage of this free money. Just over 40% of couples are actively coordinating their contributions to maximize any additional savings they could get from their matches, while 20% are leaving money on the table.
Could those couples increase their retirement wealth simply by shifting a dollar of savings from one person to the other?
Breaking down employer matches
To illustrate how "free" extra savings could happen, the authors of the brief provide an example. Consider a couple where both people earn $6,000 a month. The first partner's employer matches the initial 3% of salary contributed at a 1-to-1 rate. So if the employee contributes 3%, the employer does, too, but a contribution of 4% still gets only a 3% match. The second partner's employer matches the first 6% contributed but at a 50% rate, or up to a total of 3% if the worker contributes at least 6%.
Assume that this couple's budget for retirement savings allows them to save $480 dollars a month. The table below lays out two scenarios that fit within this budget: one where the first partner contributes 2% of their salary and the second partner 6%, and one where the first partner contributes 3% and the second partner 5%.
In both scenarios, the couple contributes $480, but in the second scenario they get $30 per month more in savings. And while $30 a month may not sound like a lot, a couple saving that extra amount over a 30-year period would end up with roughly $25,000 more in savings in the end (assuming a 5% real return). How did they access this free money? Simply by taking better advantage of the more generous 1-to-1 match by having the first partner save more.
That shows how couples who coordinate benefits could end up with more retirement wealth without actually saving more.
As for the remaining 40% of couples surveyed, they don't appear to be coordinating, but they also don't lose money because of it, perhaps for reasons such as both of them maximizing their match. They got lucky.
-Geoffrey Sanzenbacher