My wife and I have a question concerning our 401(k)s. Should we contribute to our individual retirement accounts evenly? Her salary is substantially larger than mine. She has 12% going into hers, and I have 10% going into mine. My thoughts were to basically put the same amount into both our accounts each week (adjusting the percentages to make this happen). You never know, she might kick me to the curb (kidding). We plan on being together forever, and all of our finances are shared evenly. Why wouldn’t we want to do the same with the 401(k)s? — Jeremy
Dear Jeremy: Eleven years ago I met a woman named Gayle. She’d just been through a relationship transition. By relationship transition, I mean divorce. That’s what my divorce attorney friend calls divorces — relationship transitions. Sorry. I meant my relationship transition attorney friend. Gayle had been a stay-at-home mom for the better part of 30 years, and her marriage was ending. From the outside, her and her future ex-husband’s life appeared to be the epitome of financial success. It wasn’t. Most of their wealth was tied up in very complicated business investments. When the marriage ended, by no fault of her own, Gayle didn’t get nearly as much money as anyone would have thought. Had she had a reasonable accumulation strategy, the likes of what you mention, her life would be much different today.
To properly explore this topic is to accept an uncomfortable reality: The idea of preparing to separate from your spouse pre-emptively, without basis, is inherently uncomfortable. It’s one part fatalist and one part practical. I want to go on and on about how preparing to not be married to the person you’re married to violates the spirit of togetherness and love, but, unfortunately, I’ve seen far too many people — mainly women — left out in the cold when the warmth of a relationship transitions into, well, cold.
Taking joint responsibility for retirement preparation is a good idea, whether you two make it to your diamond anniversary or your balsam wood anniversary. You both need to develop a healthy view on income independence by systematically breaking your dependency on your work income as you get closer to retirement. It’s not unusual for one spouse to mentally and financially prepare for retirement, while the other one to has their head in the clouds. You can prevent this by both accepting responsibility, which is obviously what you’re trying to do.
When you examine the financial lives of those who divorce, it’s common to see one person more prepared for the future, than the other. The lack of preparation is evident in both retirement accounts and daily living. Both people need to know how to budget, pay bills, save for retirement and make all sorts of financial decisions. Those four skills are priceless. If both people in a marriage develop those skills, then the financial risks and impact of a relationship transition are mitigated. Beyond divorce, or shall I say before divorce, when both individuals possess high-level financial skills, everyone wins. Your marriage will actually benefit from your joint efforts, not suffer.
Technically, one of your company-sponsored retirement plans is likely better than the other. One of the accounts will have lower fees and better-performing funds. If that’s the case, I’d be remiss in not mentioning pumping money into that account would result in higher balances than if you pumped money into the more expensive retirement plan. Therefore, by creating an accumulation strategy to account for your wife making significantly more money, you may end up cost yourself money based on the quality of the two retirement accounts.
Be sure to both increase your contributions as your incomes increase.
I do think contingency planning for a relationship transition can cross over to sealing your fate. Call it intuition, but constant talk of preparing for “what if we get divorced” seems as though it would actually lead to divorce. Be careful. There’s a fine line between practical preparation and the premonition of a plight. No matter how you cut the cake, preparing together to separate is still preparing to separate.
Peter Dunn is an author, speaker and radio host. Have a question about money for Pete the Planner? Email him at AskPete@petetheplanner.com