Unlocking Wealth: How to Avoid Missing Out on 401(k) Savings as a Married Couple

 

Unlocking Wealth: How to Avoid Missing Out on 401(k) Savings as a Married Couple

Imagine a young married couple. One partner invests heavily in their employer's 401(k), diligently saving for both spouses, while the other focuses on managing daily expenses and neglects contributing to their retirement plan, missing out on valuable employer matching funds.

This was the financial strategy adopted by Niv Persaud and her husband.

"My income was dedicated to our expenses, and he took responsibility for our retirement savings," she explained. "I had a fantastic company match, but I didn't pay enough attention to it."

Unfortunately, their marriage eventually ended. Three decades later, Persaud, now a certified financial planner in Atlanta, has become a living example of the significant retirement savings opportunities she missed out on.

The question arises, just how much potential savings did she lose?

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Persaud's response is telling: "I don't even want to think about it."

Failure to Maximize 401(k) Matching Opportunities for Married Couples

In reality, one in four married couples fails to fully leverage the employer matching contributions available in 401(k) retirement plans, as per a recent study. On average, this oversight costs them nearly $700 per year.

According to a paper titled "Efficiency in Household Decision Making: Evidence from the Retirement Savings of U.S. Couples," released in April by the National Bureau of Economic Research, nearly two-thirds of American workers have access to employer-sponsored defined contribution retirement savings plans.

Most of these plans offer matching contributions, where employers match a portion of the funds contributed by the worker. In a typical scenario, an employer may match half of every dollar contributed by a worker, up to a maximum of 6% of the worker's pay.

The study found that approximately 24% of married couples are leaving money on the table by not claiming their share of employer matching funds. On average, these couples are losing $682 annually, funds they could easily recoup by reallocating their retirement contributions. These findings are based on IRS tax data and retirement plan descriptions.

Taha Choukhmane, an assistant professor of finance at the MIT Sloan School of Management and a co-author of the paper, emphasizes, "It's not just about how much you save, it's about how and where you save."

The focus of the researchers was not on couples who don't save enough for retirement but on those who could increase their savings by merely shifting contributions between spouses.

Choukhmane clarifies, "You don't need to save more or change your spending habits; it's all about how you allocate money across accounts."

In some couples, one spouse contributes to a retirement plan, while the other ignores an opportunity with a generous employer match. In other cases, couples evenly split their retirement savings when they should have prioritized the account with a larger match.

Choukhmane underscores, "The 401(k) is really designed around individuals, and many people need to realize that this is not just about the individual."

Couples' Failure to Communicate and Coordinate on Retirement Savings

This study highlights a lack of cooperation between spouses regarding a critical aspect of household finances. It also points to the broader issue of financial communication within marriages.

The researchers found that couples who had been married longer and those with children tended to communicate and coordinate their retirement savings more effectively. Couples in shorter relationships struggled in this regard.

Couples heading for divorce were also less likely to coordinate their retirement contributions, a discovery made by studying the saving patterns of marriages that ended in divorce.

Financial advisors often recommend that American workers save 10% to 15% of their pre-tax income for retirement and maximize employer matching funds. If a company matches up to 6% of your salary in 401(k) contributions, "maxing out" means contributing at least that amount of your annual pay.

Rob Williams, managing director of financial planning at Charles Schwab, emphasizes, "The first priority for any investor should be to save enough to get at least the entire employer match."

Yet, many partners leave this money untouched. For instance, Vanguard reported that in 2022, 31% of its retirement plan participants failed to claim some or all of their employer's matching funds.

Retirement savings rates are typically lower for younger workers, whose retirement is further in the future. Among Vanguard participants, the retirement savings rate in 2022 ranged from 5.2% for workers under 25 to 9% for those over 65.

Challenges in Retirement Savings Amid High Inflation

In recent years, many Americans of all ages have struggled to save due to soaring inflation rates.

According to the 2023 Retirement Confidence Survey conducted by the nonprofit Employee Benefit Research Institute, 84% of workers expressed concern that the rising cost of living will hinder their ability to save for retirement.

While an employer match may seem like a modest amount, as James Gambaccini, a certified financial planner in Reston, Virginia, explains, "People look at it and say, 'It's only 3%,' but it's a 100% match up to 3% of your salary."

This formula means that a 3% contribution to retirement would double to 6% without the worker having to invest an extra dollar. For an employee with a $50,000 salary, a $1,500 contribution would grow to $3,000.