Viewing Retirement Assets as a Combined Nest Egg

When both spouses work, many couples see their retirement plans as interchangeable, and quite often they are not. Couples should look at their retirement assets as a combined nest egg and should be diversified as such.

When saving, it is highly recommended to begin with your employer-sponsored 401(k) plan to take advantage of the employer’s matching contribution, assuming there is one. The match is free money your employer is depositing in your account. While there is no law or tax code that requires a company to provide a match, many include the match as part of the benefits package they offer employees. Couples should each contribute to their employer plan to receive the full match.

Couples should also view their 401(k) plans as an opportunity to diversify among different asset classes. When laid side-by-side, investors can compare the investment options and select the best mix for their situation. For example, one plan may have better Large-Cap funds, while the other spouse’s plan may offer better Small-Cap funds. Ideally, couples should make sure that any overlap between their retirement accounts does not create a portfolio that is heavily focused in a single position or asset class. This can help ensure that if one asset class dips in value, the hit to the overall combined portfolio is less detrimental.

Another aspect to consider is the plan’s fees. High fees can eat into the investment return, so if one spouse’s plan carries higher-than-average fees, that investor may opt to only saving enough to receive the match. Additional savings can be directed to an IRA, as investing inside an IRA generally does not necessitate additional administrative expenses.

If couples are able to save more, then they should consider diversifying retirement assets among tax-deferred accounts and tax-exempt accounts, such as a Roth 401(k) or Roth IRA. Contributions to Roth accounts are made on an after-tax basis, so contributions offer no current tax benefits. However, at age 59 ½, distributions are generally tax free. Additionally, Roth accounts provide a little flexibility, as investors are generally able to access their contributions penalty and tax free at any time should an emergency happen and the couple need access to their savings.

Once tax-exempt accounts are fully funded, it is often best to max out the 401(k) plans, getting as much money into tax-deferred savings. Ideally, this will provide most investors with a tax break today because contributions are made pre-tax, thus lowering taxable income. Most investors are likely to be in a lower tax bracket during retirement when funds are withdrawn, but no one truly knows what future tax laws will be when you retire.

Of course, once all tax-deferred and tax-exempt retirement plans are funded, a couple can begin saving to a brokerage account. When investors are able to do this, they should also pay attention to the types of investments they have in these accounts, as they will be taxed on all of their income. Savers may want to avoid dividend-paying investments in a brokerage account, opting for more stable, long-term growth options. Tax-deferred accounts should provide a better benefit when they shelter investments that generate frequent cash flow or distributions that would otherwise be taxable.

A trusted adviser or financial planner can help a couple guide their wealth toward a common goal. If you have questions regarding how you and your spouse should allocate your retirement savings, the experts at Henssler Financial will be glad to help: