A working report reveals that many married couples neglect to take full advantage of retirement savings, particularly those experiencing marital difficulties.
The study, conducted by MIT, Yale University, and the US Treasury researchers, analyzed data from 6,000 retirement plans encompassing 44 million employees, using information from tax returns and employer W-2 forms. Though not yet peer-reviewed, the findings indicate that 24% of married couples fail to allocate funds to the spouse with the highest employer match rate, and half of these couples continue to make this error even after four years.
The study also highlights that couples with weak marital commitment were likelier to make inadequate allocations. This emphasizes the importance of couples annually reviewing and maximizing their workplace benefits to optimize their retirement savings. Cormac O’Dea, an assistant professor at Yale University Economics Department and one of the study’s authors, explains that rectifying retirement savings mistakes becomes challenging once retirement age is reached. Consequently, incorrect decisions can significantly impact one’s living standards during retirement.
The analysis reveals that couples with poor retirement allocations miss approximately $700 annually. While this amount may seem inconsequential, it can substantially affect one’s retirement wealth over time. Taha Choukhmane, one of the study’s authors from MIT, explains that an additional $700 per year in a 401(k) with compound interest can significantly improve retirement preparedness. For instance, contributing $700 annually, which equates to about $58 per month, over 30 years with a 5% annual return rate would accumulate to over $46,000, as calculated by a government compound interest calculator.
The solution to saving this money is as simple as redirecting funds from an account with a lower employer match rate to one with a higher rate. Choukhmane suggests that this reallocation can be accomplished without sacrificing one’s current spending habits and lifestyle. The crucial aspect is to shift the savings location from the account with a lower incentive to the one with a higher match rate, resulting in increased employer contributions.
Additionally, the analysis demonstrates a correlation between poor retirement allocations and weaker marital commitments and the reverse relationship. Factors such as marriage duration, homeownership, children, joint bank accounts, and the likelihood of a divorce event were assessed to gauge marital commitment.
Choukhmane suggests that longer marriages, shared homeownership, and children improve couples’ conditions to cooperate, coordinate, and openly discuss financial matters.
To address these challenges and navigate the complexities of retirement planning, couples are advised to strategize together and consider seeking guidance from financial advisors.
Kevin O’Brien, founder, and president of Peak Financial Services, emphasizes that an advisor can provide valuable assistance in maximizing each spouse’s employer benefits and government retirement plans. He mentions that retirement planning has become increasingly intricate over the years, necessitating specialized departments dedicated to various aspects such as estate planning, tax reduction, investments, insurance, and cash flow management.
O’Brien expresses concern over a recent trend of prioritizing short-term spending gratification over long-term planning, likely influenced by the aftermath of the COVID-19 pandemic.
He asserts that financial planners can help individuals balance present enjoyment and future security. O’Brien advises clients to “live for today, but plan for tomorrow,” as a good financial planner can alleviate uncertainties and provide a clear roadmap for achieving their goals.