How 1 in 4 couples is giving up ‘free money’ in their 401 (k) plans

Imagine a young couple. One partner has invested heavily in his girlfriend’s 401(k) from his employer and is saving for both of them. The other is focused on paying the bills, contributing nothing to her retirement plan and missing out on her employer’s matching funds.

That’s how Niv Persaud and her husband handled their finances.

“My income was going to cover living expenses and he was going to focus on his retirement,” she said. “I had a great game internally and I didn’t care about that.”

Eventually, the marriage came to an end. Thirty years later, Persaud is working as a certified financial planner in Atlanta. The loss of her retirement savings serves as a lesson to her.

How much potential savings did she lose?

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“I don’t even want to think about it,” she said.

Couples aren’t taking full advantage of 401(k) matching options

In fact, a recent study found that one in four couples are not taking full advantage of their employer’s matching contributions to their 401(k) retirement plan. On average, this oversight costs nearly $700 per year.

Almost two-thirds of American workers are Access to employer-sponsored defined contribution retirement savings plansAccording to a paper published in April by a U.S. government agency titled “Household Decision-Making Efficiency: Evidence from U.S. Couples’ Retirement Savings.” National Economic Research Bureau.

Most plans offer a match. The employer contributes to her 401(k) and matches some or all of the funds the worker paid into the plan. In one typical model, the employer matches half of every dollar a worker contributes, up to a maximum of 6% of the worker’s salary.

The survey found that around 24% of couples were left with money because they were unable to claim a portion of their employer’s matching funds. These couples lose an average of $682 a year in money that could be recouped by simply changing their retirement savings. The findings are based on IRS tax data and retirement plan descriptions.

“There’s a lot of advice out there that says, ‘You should save more,'” he says. Taha Chokmane, assistant professor of finance at the Massachusetts Institute of Technology Sloan School of Management. “It’s not just how much you save; it’s how you save and where you save.”

Choukhmane is a co-author of this research paper. Cormac O’Deaassistant professor of economics at Yale University, and Lucas Goodman, Treasury economist.

The researchers stressed that they were not focusing on couples who were not saving or not saving enough for retirement. Instead, they focused on couples who can increase their savings by simply transferring contributions from one spouse to the other.

“You don’t need to save more. You don’t need to change the way you spend your money,” Chalkmane says. “What matters is how you allocate your funds between your accounts.”

Researchers found that in some couples, only one spouse contributes to a retirement plan while the other spouse ignores plans with generous employer matches. . Other couples split their retirement savings evenly when they should have put more money into matching accounts.

“The 401(k) is really designed around the individual,” Chalkmane says. “And I think a lot of people need to understand that this is not about individuals.”

Couples cannot communicate and coordinate retirement savings

A new study has highlighted the lack of cooperation between husband and wife on the important issue of household finances. The researchers said this also spoke to the broader issue of financial communication in marriage.

“This raises the question of what other big decisions couples aren’t coordinating about,” said O’Dea, an assistant professor at Yale University.

Researchers found that couples who have been married longer and have children tend to be better at communicating and coordinating their retirement savings. Couples who had been dating for a short time fared worse.

Couples heading for divorce were also less likely to adjust their retirement contributions. Researchers discovered this by studying the savings patterns of marriages that ended in divorce.

Investment advisors often recommend that American workers: Save 10% to 15% of your pre-tax income Due to retirement. It also calls for maximizing the use of matching funds from employers to increase workers’ real savings rates.

If your company matches your 401(k) contribution up to 6% of your salary, “up to” means contributing at least that amount of your annual salary.

“The first priority for investors is to save enough to at least match all of their employers,” he said. rob williamsManaging Director, Financial Planning, Charles Schwab Company.

However, many partners leave their funds untapped. For example, Vanguard reports that 31% of retirement plan participants were unable to claim some or all of their employer matching funds in 2022.

Retirement savings rates are lower for younger workers, and retirement occurs farther in the future. Vanguard participants’ 2022 retirement savings rates ranged from 5.2% for employees under age 25 to 9% for employees age 65 and older.

Americans struggle to save for retirement amid high inflation

Many Americans of all ages have struggled to save over the past two years, when inflation has hit a 40-year high.

How do you define “wealth”?:These five numbers answer the question.

In the 2023 Retirement Confidence Survey conducted by the nonprofit Employee Benefit Research Institute, 84% of workers expressed concern that rising costs of living will cause them to retire from retirement. It becomes difficult to save money Due to retirement.

An employer match may not seem like a big deal.

“People look at that and say, ‘It’s only 3%.'” James Gambaccini, a certified financial planner, says: Located in Reston, Virginia. However, “up to 3% of salary will be matched 100%.”

The formula Gambaccini describes puts up to 3% of an employee’s salary in full retirement, doubling the 3% contribution to 6% without the employee spending an extra dollar. It will be. If an employee’s salary is $50,000, his contribution of $1,500 increases to $3,000.

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How 1 in 4 couples is giving up ‘free money’ in their 401 (k) plans

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