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Why You Need to Consider Your Spouse When Planning 401(k) Contributions

Christy Bieber, The Motley Fool

Most financial experts advise you to replace at least 70% of pre-retirement income if you want a comfortable retirement -- and this is a conservative recommendation because many seniors end up spending more.

When figuring out the amount of income you need as a household during retirement, you'll have to take both spouses' income into account if you both work. Unfortunately, troubling data from the Center for Retirement Research (CRR) at Boston College shows this often isn't happening.

The problem, the CRR found, is that in many two-income households, only one spouse has access to a workplace retirement plan and the other doesn't. In these households, the spouse with the workplace plan should be saving more to pick up the slack for the spouse without one -- but this often isn't happening. The result is that the couple isn't ready for retirement when the time comes. 

This doesn't have to happen to you and your spouse if you work together to make a retirement savings plan that makes sense for both of you.

Tipped over glass jar full of coins that's labeled 401(k)

Image source: Getty Images.

Too many workers don't consider their spouse in making 401(k) contributions

According to the CCR, workplace retirement plans are available only to around half of all workers in the private sector. When these plans aren't available, most people don't end up saving anything for retirement. The result is that many dual-income couples have just one saver. 

Unfortunately, the single saver rarely contributes enough to a 401(k) to ensure that 70% or more of combined household income is replaced in retirement, according to the CRR. In fact, the average contribution rate to a 401(k) by a single saver in a dual-income household is actually below the average contribution that each spouse makes in situations where both members of a couple work and save. In dual-income households where both spouses have a workplace retirement plan, the average contribution rate is 9.4% of income, while the average contribution rate when there's only one saver in a dual income couple is just 8.4%. 

One result is that, when considering total household income, couples with only one saver end up putting just 4.9% of household income away for retirement. This is well below the recommended minimum 10% of income you need to save to have close to enough money to live on in retirement. And in fact, thanks to longer life spans and more-conservative projections for investment returns in coming years, most experts actually advise saving much more than 10%

What to do if only one spouse has a workplace retirement plan

If only one spouse has a 401(k) plan, it's imperative both partners work together to establish joint goals for retirement savings that ensure sufficient income for the household. 

One of the easiest ways to address the problem is for the worker with a 401(k) to double the contribution to account for the fact the other spouse doesn't have a 401(k) at work. The risk of this is that the spouse without the 401(k) will be left with little for retirement in the event of a divorce. While a divorce settlement agreement can and should ensure both spouses have shared access to retirement assets, this doesn't always happen in practice.

The spouse making 401(k) contributions for both partners could also end up hitting the 401(k) contribution limit, which is $19,000 in 2019 for most workers or $25,000 for those over 50 eligible to make additional catch-up contributions. 

Another option is for the spouse without access to a workplace retirement plan to contribute to another tax-advantaged plan outside of work, such as a traditional or Roth IRA. This ensures each spouse has a retirement account in that spouse's name, and that both spouses are making contributions from their own salaries to ensure sufficient retirement income for the entire household. 

A potential downside to this is if the couple together has a combined income that causes a phaseout or elimination of the tax deduction for IRA contributions. This can happen for high earners. In 2019, for example, if your spouse has a workplace retirement plan and you don't, you begin to lose eligibility to make tax-deductible IRA contributions or to make Roth contributions once your combined household income hits $193,000 if married filing jointly. And you lose your eligibility entirely once your combined income in 2019 hits $203,000. 

There's also a problem if the spouse without a workplace retirement plan has income is so high that the household member can't contribute the recommended 15% to 20% of income to an IRA. If the spouse who doesn't have a workplace retirement plan earns $100,000, for example, a 15% contribution (or $15,000) is well above the annual limit for tax-advantaged IRA contributions -- which is $6,000 in 2019 or $7,000 if you're over 50 and eligible to make catch-up contributions.

You'll need to consider pros and cons of these different options and decide how best to maximize joint retirement savings for your household. For some couples, this could mean the spouse with access to a workplace plan increases contributions and the other spouse contributes to an IRA as well. 

Make sure to plan for retirement with your spouse 

In two-income households, saving for retirement should be easier -- but you must remember that you have more income to replace. Money from Social Security alone won't give you enough to live on, so be certain to coordinate with your spouse to ensure you're both saving enough. If only one spouse has a workplace retirement plan, you need to take this into account when deciding how much to contribute for a comfortable and secure retirement.

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