Saving for Two: Avoiding a Common Retirement Mistake

I admit it, this blog often focuses on depressing topics. The decline of middle income workers. Or, the persistence of gender and racial wage gaps. I mean, there is a reason I usually only get invited to friends’ parties once. These posts, while depressing, are meant to inspire thoughts about societal priorities and policy. But, today, I want to write a different sort of post. A “how to” if you will, on a topic near and dear to my heart — retirement savings. (And yes, I realize how sad it is for retirement savings to be near and dear to my heart.)

Screwing up retirement saving is an equal opportunity endeavor. For example, a 2018 study found that while 56 percent of low-income households were at risk of having inadequate retirement savings, so too were 41 percent of high-income households. So, even if you are on the right side of income inequality, you can end up on the wrong side of retirement inequality. Today’s post is about one way to avoid this outcome. But, before the “how to” part of the post, a bit of a primer is in order. What is the point of retirement savings anyway?

Retirement Savings: The Goal

People like to describe the U.S. retirement system as a “three-legged stool.” The first leg of the stool is Social Security. (If curious, I have a post here on the financial troubles the program is in and also why, despite these troubles, the program will still be there for you when you retire.) The second leg of the stool is employer-sponsored retirement plans, mostly 401(k)s. The third leg of the stool is other financial assets. Today’s post is on the second leg: employer-sponsored retirement plans.

When you sock your money away in a 401(k), have you ever thought about your actual goal? Maybe you just picture a beach. Or, a mountain retreat. Me? I picture a pile of money that, when combined with Social Security, can replace the income of my working life. Then, I picture swimming in that pile of money like Scrooge McDuck.

I too have dreams.

That’s right, the goal of retirement savings is to replace your earnings. Economists have this thing called the “life-cycle” model that describes how to maximize happiness over the lifespan. And one of the tenets of this model is that the way to be as happy as possible is to “smooth consumption.” Smooth consumption means that from year to year, you do not experience big shifts in how much you consume. So, when retirement causes a big drop in earned income, you need to have savings set up to replace that income.

So, how much do you need? The rule of thumb says that you need to have savings to replace about 70 percent of your household’s pre-retirement income. It’s 70 percent and not 100 because certain sources of spending, like taxes or work-related expenses go down once retired. So, if your family made $100,000 a year, the goal is getting to $70,000 a year of income in retirement.

Social Security might get you half way there, providing about $35,000 a year. This fact means that you need a 401(k) that can generate another $35,000 a year in income. If you follow a common rule and withdraw 4 percent of savings a year, getting to $35,000 a year requires over $800,000 in savings. By the same rule, if your household made $150,000, you would need even more savings — over $1.3 million. In other words, whatever your family earns, the rule is simple: earn more, save more.

How Couples Screw Up

The good news is that, in general, the “earn more, save more” rule is really easy to follow. Most 401(k) plans are set up in exactly this way. You contribute a percent of your salary, and if you are lucky your employer matches. According to Vanguard, the median combined employee and employer contribution to retirement plans hovers around 10 percent of salary. So, if you make $100,000 a year, you save $10,000. Get a raise of $2,000, next year you save $10,200. And, I have more good news. If you start saving at 25 and do so continuously to age 65, this 10 percent is enough to secure an adequate retirement.

Of course, many ways exist to screw up. You could not save continuously. Or, you could start saving late. You could even retire early (Don’t! It’s bad for you health.). But today I want to focus on one screw up in particular, one you might be doing right now — ignoring your spouse. And no, I don’t mean forgetting Valentine’s today. Or, never bringing home flowers (note to self: get flowers!). I mean something even worse. Much worse. Ignoring their retirement savings behavior.

Here’s the thing. That 10 percent per year you need to save from 25 to 65? That amount is of your household’s earnings. After all, if you want to avoid a drop in consumption, you need to replace both you and your spouse/partner’s income when you retire. But, what if your spouse is working but isn’t saving for retirement? Perhaps because they are one of the 33 to 40 percent of workers without a 401(k) at all. Odds are, you haven’t noticed.

The Survey Says: Pay Attention to your Loved Ones…Saving!

In a 2019 study, a colleague and I looked at this very issue. We used the Survey of Income and Program Participation to study how much individuals with 401(k)s contributed based on the situation of their spouse. What we found was bad. No matter what the individual’s spouse was doing — not working, working and saving, or working and not saving — the individual saved around 9 percent of their individual earnings. In other words, individuals acted like, well, individuals. They did not act like members of a team whose entire income needs replaced in retirement.

This fact means that dual-earning couples where one spouse wasn’t saving for retirement ended up with the lowest contribution rates as a share of their household income. The figure below shows our main finding.

Figure. Share of Income Saved by Households, based on Couples Working and Saving Pattern

Source: Hou and Sanzenbacher (2019). Calculations from the 2008 and 2014 SIPP
panels, representing calendar years 2009, 2011, and 2013.

Dual-earning couples with just one saver are saving nowhere near the 10 percent required. We also calculated the consequences of this behavior. About 53 percent of dual-earning couples are at risk of not having enough money for retirement. Compare this amount to just 45 percent of single-earning couples. To put it differently, couples with two earners who should have a huge leg up in terms of saving, end up more at risk because of this oversight.

An Easy Problem to Fix

Fortunately, this problem isn’t that hard to fix. The easiest thing you can do is sit down with your partner and ask them if they are saving. If they are not saving, ask why. Are they offered a 401(k)? If so, they should save through it to take advantage of any match their employer offers. If not, then it’s time for you — the saver — to step up. Figure out how much you and your partner earn combined and try to get to 10 percent of that through your individual contributions. If you make $60,000 a year and your spouse makes $40,000, then you need to save about 17 percent of your salary (when combined with the employer match) to get to 10 percent of your combined earnings.

Societally, some steps also exist that we could take. This whole problem exists because many workers lack retirement plans. Some states are trying to fix this coverage problem through so-called Auto-IRAs. These programs allow workers whose employers do not offer a retirement plan to automatically contribute a percent of their salary to a statewide Roth-IRA. These efforts should be supported, not discouraged.

There are steps that employers that offer 401(k)s can take take too. Workers often set a contribution rate and forget it, failing to take into account life changes. Yet, employers are likely aware of a worker’s marriage status due to tax withholding. Reminding employees who are married to think about their spouse when setting a contribution rate would be an important part of any 401(k) education program.

Many employers also offer their employees automatic enrollment — meaning employees don’t have to take action to start saving. This feature is very helpful to workers, but also means that they probably don’t think too hard about their contribution rate. Coupling this auto-enrollment with auto-escalation, where contribution rates increase each year, can help workers ensure they are saving enough.

Of course, while social and employer-based solutions are great, in this case the easiest thing to do is just to talk to your spouse and do some arithmetic. Are you saving 10 percent of your household income? If you are, you are off to a good start for a secure retirement. If not, it’s an easy fix — tell your employer you want to save more.

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