Spouse 401(k) contributions can add thousands to retirement savings

Spouse 401(k) contributions can do more than split retirement chores: they can change how much employer money a household collects, according to a Center for Retirement Research at Boston College brief discussed by MarketWatch columnist Geoffrey Sanzenbacher.

The brief, by Taha Choukhmane and Cormac O’Dea, looked at whether married couples line up their retirement saving choices to get the most from workplace matches. Its finding is a sharp one for households with two plans in play: slightly more than 40% of couples are actively coordinating contributions to maximize added savings from matches, while 20% are missing out on money they could receive.

Sanzenbacher, a Boston College economist and Center for Retirement Research fellow, wrote that communication can be a major hurdle for couples, but the payoff can be real when both spouses have access to 401(k)-style accounts.

How should spouses coordinate 401(k) contributions?

The basic move is to compare both workplace plans before deciding how much each spouse contributes. If one employer offers a richer match at lower contribution levels, a couple may be able to shift the same total monthly savings toward that plan and collect a larger employer contribution.

A 401(k) match is money an employer adds to a worker’s retirement account based on that worker’s own contribution. Match formulas differ by plan, so two spouses saving the same combined amount may get different results depending on which paycheck the money comes from.

The issue matters because defined-contribution plans, including 401(k)s, have become the main retirement plan type in the U.S., according to Sanzenbacher. He wrote that workers often have several choices to make: whether to join if they are not automatically enrolled, what to invest in and what share of pay to save.

More than 80% of employers that sponsor 401(k) plans offer a match, MarketWatch reported, and those matches often depend on how much the employee contributes. A study cited by Sanzenbacher found that individuals frequently make suboptimal choices with these plans, missing employer contributions they could have received.

The example behind the extra $25,000

The Boston College brief gives a two-earner example. Both spouses earn $6,000 a month, and the household can save $480 a month for retirement.

• Partner one’s employer matches the first 3% of pay dollar for dollar.
• Partner two’s employer matches the first 6% of pay at 50 cents on the dollar, for a maximum match equal to 3% of pay.
• One setup has partner one saving 2% and partner two saving 6%.
• Another setup has partner one saving 3% and partner two saving 5%.

In both setups, the couple puts away the same $480 from their own paychecks. In the second setup, the household receives $30 more per month because it makes fuller use of the first partner’s dollar-for-dollar match, according to the brief.

That extra $30 a month may look small on a budget spreadsheet. Over 30 years, assuming a 5% real return, the brief’s example says it would produce about $25,000 more in retirement savings.

The remaining roughly 40% of couples in the brief did not appear to coordinate their contributions, Sanzenbacher wrote, but they also were not losing match money. One possible reason given was that both spouses were already contributing enough to capture their full matches.

The practical takeaway from the brief is narrow but useful: couples do not always need to save more to end up with more in retirement. In some cases, they need to put the same dollars into the two plans in a smarter order.

This story draws on original reporting from MarketWatch.