The 5-step guide to retirement for couples
Beth takes on a tricky new money question—and offers expert advice on how to resolve it and how to talk it over in constructive ways.
The situation
My partner and I are getting married this summer (yes!) and we’ve only recently realized that this means our finances are getting married, too. I’m especially concerned about how to combine our retirement savings. We are both in our mid-thirties and well into our careers—she has her own business as an engineering consultant, and I’m a nine-to-five hospital administrator. She has an assortment of IRAs. I’ve had only two employers since I finished grad school, so my retirement savings are in a pair of 401(k)s—one of which is actively getting an employer match. Embarrassingly, I also have a pile of cash in a savings account waiting for me to do something with it. How can we pool our retirement savings as a married couple to make it work best for us?
—Michelle, Wilmington, N.C.
The solution
The fact that you’re even thinking about this puts you light years ahead of many couples. According to a new report from the National Institute on Retirement Security, two-thirds of working millennials (like yourselves) have nothing at all saved for retirement. It’s also fortunate that one of you has a matching 401(k). In the same study, about 40% of millennials said they hadn’t saved for retirement because they were ineligible for employer-sponsored plans (which could be chalked up in part to your generation’s rising rates of part-time employment).
Couples can combine their savings and pool other assets, such as homes or cars, and it would be nice if they could do the same for retirement accounts like IRAs and 401(k)s. Unfortunately, as Annette Clearwaters, president of Clarity Investments + Planning in Mount Kisco, N.Y., pointed out, “There’s no such thing as a joint IRA.” But, Clearwaters went on to explain, “that doesn’t mean a couple shouldn’t have a cohesive strategy.” You might have separate retirement accounts, but you need to prep for the golden years as a team. Here are five steps to get you started.
Consolidate
Many people come to a relationship with a grab bag of investments, managed by an assortment of institutions. For your own sanity, consolidate them. “I find people with lots of accounts usually don’t have an overall strategy, so consolidating can help make their investing more manageable,” said Clearwaters. That 401(k) with your current employer can stay right where it is, but consider asking your former employer to help you arrange a direct rollover of your old 401(k) into an IRA. Then combine all your IRAs at a single financial institution where you can monitor and manage them with ease. Pick a firm that offers investment options with the most solid returns and—this is key—the lowest fees. My advice: Go with a stock index fund or stock index ETF through a company like Vanguard. (One caveat: Changes like these can lead to unforeseen levels of complexity, and there may be tax implications to consider too, so think about first consulting with a financial planner, an accountant—or both.)
Allocate
Decide where to put retirement savings you’re currently accumulating, based on the investment vehicles available to you. How much you contribute is mostly out of your hands: The annual limit for what either of you can put into an IRA is $5,500. And you can’t invest more than $18,500 a year in a 401(k). Because your partner is self-employed, though, she’s likely eligible for a SEP-IRA (or a solo 401(k), a similar product), where she can park up to $55,000 a year. But how do you prioritize? Clearwaters’s advice here is spot on: First, she says, max out the match. In other words, contribute as much as you can to your 401(k) to take full advantage of the matching contributions from your employer. Let’s say your boss kicks in 50 cents per dollar saved: That’s a 50% return guaranteed—way better than you’ll get anywhere else. Only after you’ve done this should you contribute to an IRA.
Keep some cash
As for that pile of cash in your savings account: This might sound like counterintuitive advice in a piece about retirement, but you should make sure to keep some cash on hand that you can get to easily. Why? Retirement accounts are tough to tap. For the most part, withdrawing from them before you hit age 59½ will trigger a stiff penalty. It’s crucial to have enough accessible savings in an emergency fund to cover three-to six months of living expenses should you lose a job, suffer an expensive health crisis, or experience some other setback—without incurring those penalties, or draining the nest egg you’ll need in the future.
Divvy it up
Now that your financial lives are combined, talk about how much of your respective salaries each of you will contribute to retirement. Some couples simply divide it right down the middle. But if one of you is bringing home a lot more money than the other, you might want to invest a weighted percentage of your respective salaries. Either way, come up with a plan that you both feel is fair.
Talk about your fears
You’re tying the knot, so you probably know a thing or two about your partner’s taste for adventure (or lack thereof)—if she’s a roller coaster rider or sticks to the Ferris wheel; if she never strays from California rolls at the sushi bar or goes straight for the blowfish sashimi. But how much do you know about your partner’s risk tolerance when it comes to investing? Mutual funds come in different blends of stocks and bonds. Those that skew heavier on stocks tend to be more of a gamble; bond-rich funds carry less risk. Talk about which you prefer. According to Clearwaters, “They just need to agree on what they are comfortable with, understanding that less risk is likely to mean slower long-term growth and potentially working longer, and more risk makes looking at their balances during market downturns more unpleasant.”
It’s okay if one of you likes a financial Ferris wheel and the other prefers to ride the retirement roller coaster. After all, opposites attract—in money and in life. Mazel tov!
