A recently conducted working paper uncovers a disconcerting trend among married couples: a significant proportion of them are leaving retirement money on the table, with the most vulnerable being those in marriages showing signs of instability. This revelation underscores the importance of prudent and well-informed financial planning in ensuring a secure retirement.
According to the analysis conducted by researchers from the Massachusetts Institute of Technology (MIT), Yale University, and the U.S. Treasury, about 24% of married couples fail to allocate retirement funds to the spouse with the highest employer match rate. Four years later, half of these couples persist in this financial misstep. Disturbingly, couples falling short on five key indicators of marital commitment were more likely to make these poor allocations.
The researchers’ findings drive home the necessity for couples to regularly assess their workplace benefits and strategically maximize their retirement savings. “By the time you get to retirement, it’s too late to rectify any mistakes,” Cormac O’Dea, assistant professor at the Yale University Economics Department and co-author of the study, warned in an interview with Yahoo Finance.
The working paper, funded by the Retirement and Disability Research Consortium and the Yale Economics Tobin Center for Economic Policy, scrutinized regulatory filings from 6,000 retirement plans covering over 44 million employees. The analysis revealed that couples making poor retirement allocations neglected approximately $700 per year, a sum that may seem insignificant but can substantially bolster wealth at retirement.
Taha Choukhmane, who teaches at MIT and was also part of the research team, explains the impact of this seemingly small amount: “Getting an extra $700 from the employer in your 401(k) with compound interest can really create meaningful change to your retirement preparedness.” As an illustration, an additional $700 a year in your 401(k) — approximately $58 a month — can accumulate to over $46,000 over a 30-year period, given a 5% annual return rate.
One simple, yet impactful strategy to save this money is by moving funds away from an account with a lower employer match rate to one with a higher rate. Choukhmane emphasizes the simplicity and lack of sacrifice this entails: “That means you don’t need to cut on your spending. You can go to the restaurant as frequently as before. But simply changing the location of your saving from the savings of the spouse with a lower incentive to the account of the spouse with a higher match rate can raise the contribution you get from your employer.”
A correlation was also observed in the study between poor retirement allocations and weaker marital commitments. Marital commitment was assessed by various factors such as marriage duration, homeownership, the presence of children, existence of a joint bank account before marriage, and a “divorce event in the near future.” Choukhmane noted, “If you’ve been married for longer, you own a house together, you have kids together, maybe these are better conditions for people to cooperate, coordinate, talk more about finances.”
In light of these findings, couples are urged to strategize together and consider seeking the guidance of a financial advisor to navigate the intricacies of retirement planning. Kevin O’Brien, the founder and president of Peak Financial Services, asserts that retirement planning has become increasingly complicated, and an advisor can provide an invaluable service by comparing each spouse’s employer benefits to maximize their financial potential.
With the post-COVID period witnessing a shift towards short-term spending, O’Brien advises couples to maintain a balance between enjoying the present and planning for the future. He believes that a good financial planner can assist in eliminating guesswork and clarifying the resources needed to achieve their retirement goals.
Ultimately, the paper highlights the missed opportunities in retirement savings amongmarried couples, and the need for strategic financial coordination between spouses. It reveals the cost of misaligned financial planning, particularly in marriages with signs of instability. However, with the right planning and financial advice, couples can leverage their employment benefits to secure their future.
At its heart, the issue revolves around financial literacy and open communication about finances within a marriage. Financial discussions and strategic planning should not be seen as optional but as an integral part of any partnership. Regular assessment of workplace benefits and understanding employer match rates can significantly impact the amount accumulated for retirement.
Moreover, the findings also suggest that stronger marital commitment may play a role in improving financial decision-making. Couples who have been married for longer, own a home together, or have children are more likely to cooperate and discuss finances, leading to better financial decisions.
In an increasingly complicated financial world, the role of financial advisors is becoming more critical. They can provide professional guidance and in-depth understanding of the different financial benefits, retirement plan options, and help couples maximize their finances effectively. Kevin O’Brien, who has been in the financial services sector for over 34 years, emphasized the importance of balancing short-term spending desires with long-term financial planning.
The message is clear. For married couples, a successful retirement plan should be based on a holistic approach that includes financial literacy, open communication, cooperative decision-making, and, if needed, professional financial advice. After all, the goal is not just to live for today but also to secure a financially stable tomorrow.
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