Retirement planning is best done at the household level.
But that's not how couples save for retirement. Instead, households sock money away for their golden years in tax-advantaged accounts -- 401(k)s, IRAs and the like -- held in the name of one individual, according to new research published by the RAND Corporation.
What's more, the researchers discovered -- though it might not be a surprise -- that a household's retirement assets and contributions are more likely to be in accounts held in the husband's name or the primary earner's name and that the "location of contributions is largely driven by the distribution of earnings within couples."
"While spouses have rights to these assets in the case of divorce and in most cases of death, the separation of accounts in name may cause couples to treat their accounts as separate, with each spouse making decisions separately," wrote the authors of the report, Katherine Grace Carman, an economist at the RAND Corporation and a professor at the Pardee RAND Graduate School, and Angela Hung, the director of the RAND Center for Financial and Economic Decision Making and a senior economist at the RAND Corporation.
And that can cause retirement-planning problems. With separate accounts, the authors noted, one spouse may not be aware of the contributions or assets accumulated in the other spouse's accounts and this may lead to sub-optimal decision-making, as individuals in a couple may not fully optimize across all available retirement accounts.
So, to optimize retirement planning, Carman and Hung wrote that couples should "consider the entire household portfolio together, accounting for the characteristics of the retirement accounts, the age of the spouses, and income differences between spouses."
Given their research, what advice do Carman and Hung have for households that are saving and/or living in retirement? "Our overarching advice is that retirement savings decisions should be a joint household decision," Hung and Carman wrote in an email.
For example, to determine how much to save for retirement, couples should sit down and talk about long-term plans such as:
- - When do we want to retire? Do we want to retire at the same time?
- - How much do we want to have in retirement savings? What type of lifestyle do we want in retirement?
Or to determine whose retirement account to save into, Carman and Hung wrote that couples should fill out their retirement plan enrollment forms together and discuss:
- - What types of retirement plans do our employers offer? Which employer(s) offer a match? Are our employers' plans' fees comparable? Do they offer the type of investments that we want? Do they have similar rules on loans in case we have an emergency?
- - What is our timeline for withdrawing our retirement savings? Do we want to begin drawing down as soon as we can without penalty? Or do we want to constrain ourselves, and let our investments grow until the younger spouse can retire?
Other experts and advisers who reviewed Carman and Hung's study have plenty of advice for couples as well.
Mental accounting together
Dana Anspach, the founder of Sensible Money, a fee-only registered investment advisory firm, notes that most people engage in some form of mental accounting. "For example, they designate a certain bank account for a certain purpose," she said. "This can work well if it is an emergency fund, but when it comes to retirement-income planning, mental accounting may be costing you money."
Couples, she said, may be putting away money in various types of retirement accounts without giving much thought to what their other half is doing. "By looking at it together, in many cases, they can make decisions that provide better results over the long run," said Anspach.
For example, she said, a younger spouse may be more conservative and allocate her IRA or 401(k) account to 50% stocks and 50% bonds, while the older spouse may be more aggressive and have 85% of their retirement accounts in stocks. "This allocation does not match up with when and how the funds are likely to be used," she said. "The older spouse will have to take required distributions from their account much sooner, and common sense says that is the account that should be invested more conservatively."
So, by viewing financial accounts as a household, Anspach said couples can make better decisions as to which accounts to fund and how to allocate their investments in a way that matches up with when the funds will be used. "This approach involves looking at how all household wealth can be aligned to work together to produce retirement income," she said.
Older spouse should fund a Roth account
So, for example, in some cases where the older half of a couple already has quite a bit of money in tax-deferred retirement accounts, it may make sense to have the older spouse fund a Roth or Roth 401(k) instead of continuing to make deductible contributions. "If the older spouse continues to make the deductible contributions, it will mean larger required distributions -- and higher taxes -- in retirement," said Anspach. "By flip-flopping and having the older spouse fund Roth accounts while the younger makes deductible contributions, this couple may be able to reduce the taxes they pay in their retirement years."
Unfortunately, she said, it's difficult to apply rules of thumb, as the most appropriate funding, withdrawal, and allocation strategies are highly dependent on each couple's projected tax rates both now and later in retirement.
Think income in retirement
A household needs to consider "what prioritized sequence of actions involving tax deferral between spouses provides the most after-tax grouping of assets by age 70˝," said Kerry Uffman, the founder of TWRU Private Wealth Management.
"I pick that date as the target date of reckoning because that is when two taxable income items converge," he said. "RMDs and the end of the age 70 Social Security optimization delayed benefit tactic. Income at age 70 really gets bunched up when these aspects converge."
The years before age 70 seem to be the window to do things that build after-tax wealth, according to Uffman. That includes Roth IRA conversions (and contributions), contributions to health savings accounts (maybe with a one-time IRA direct deferral), and rebalancing by selling assets that have capital gains when such gains might be taxed at 0%.
A couple will likely have low taxable income if they wait to claim Social Security until age 70.
"So, I'm thinking, whatever combination of deferrals and HSA contributions that allows a couple to relocate deferred income and assets into Roth and HSA accounts, while pursuing Social Security optimization tactics, and milking 0% tax brackets for capital gains and dividends, is well worth the engineering of a household's affairs," said Uffman.