Most couples have one adult who is the “primary wage earner,” and one adult who does not work, or who has significantly less income than the primary wage earner.
One frequent result of income inequality is inequality in the retirement savings of the two adults.The main earner may be vested in a retirement pension plan, and might also contribute to a tax-advantaged, employer-sponsored account such as 401(k), 403(b), TSP. The main earner may also contribute to an Individual Retirement Arrangement (IRA.) In many cases, the other partner may not have any retirement savings at all, or may occasionally make contributions to an IRA. As a result, you may have a couple in which one partner has a large retirement account, and the other partner has a small or no retirement account.
So What? Why Does This Matter?
This isn’t great, from an economic view or from a relationship view. I’ve been trying to decide which one is more important, but I just can’t. I try not to get into relationship stuff here, but I think this issue is very tied up in the emotions and I’ll try my best to explain.
Any sort of economic imbalance is stressful on relationships. For most couples, a fully integrated financial life is an important part of the solidifying of their marriage. Striving for balance in retirement savings promotes feelings of security in the lower-earning spouse. How do you think it feels to have someone say, “It is important to me that we save as much money as possible for you.” What an amazingly powerful message that sends.
The practical aspect is also important. Every relationship end, either due to death or divorce, and the lower-income partner often suffers financially. More balanced retirement savings decreases the gap between the finances of the two partners. While there are some people who are actively trying to make a divorce unbalanced, most are trying to be fair and reasonable.
Unfortunately, retirement accounts aren’t set up to be integrated. They have to belong to an individual, even though you can make someone the beneficiary of your account if you were to die.
Ways To Add Balance
Fortunately, there are some easy and some not-so-easy ways to increase the retirement savings of the lower-income partner.
First, start an IRA for the lower- or no-income spouse. IRA regulations allow the same contributions for a non-working spouse as for the working spouse, provided the total household income is enough to allow both contributions. Consider a USAA IRA for their low fees and great service – I’ve been using USAA for my IRAs for nearly 20 years!
Second, if the lower-earning partner has a job, sign up for any employer-sponsored retirement savings plan and focus on saving within this account. When job-hunting, give priority to jobs where the company offers 401(k) or 403(b) participation for part-time employees, and more priority to those who provide company matching funds for contributions. Be sure to check the eligibility requirements, such as how long you have to be employed and how many hours you have to work, so that you can make a good comparison.
Even that $9 per hour Starbucks job can boost your retirement a lot if you are able to contribute a significant portion of your pay and take advantage of the 4% (sometimes 6%) company match.
The third, and more complicated, way to is to start a small business and open a SEP, Simple, or Solo 401(k) account. These accounts usually have much higher contribution limits than employer-sponsored plans, which allows you to grow your savings more quickly. However, you’ll have to create some sort of self-employment income (even home party plans county) and then set up an account. Your bank, credit union, or investment institution should be able to help you choose the right account, establish it, and make funding arrangements.
If you have unequal income in your relationship, it will require a little extra effort to ensure that retirement savings are balanced between both partnership.The effort is worth the result of a more positive financial relationship and a better distribution of the couple’s assets.
How does your family deal with this issue? Has it been a problem? Is this first time you’ve thought about it?
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I agree, but think it needs to go further. If you are not in a community property state, create a legal, written agreement that says all the deferred compensation and long-term saving/investment accounts are joint property.
Then, if the partnership dissolves, these assets are split fairly.
Of course it’s a whole lot easier to make this part of the process of getting married – if you’re near a split-up, the high earner won’t be as agreeable and the low/no earner will have to take what the divorce court decides.
Of course, you also have the obligation (and right) to participate as equals in the management of the accounts. So, keep reading Kate’s blog and learn your way around an account statement!
Live Long and Prosper – Leah, the MoneyDiva.com