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Strategies for Married Couples: How to Coordinate Your Plans

Many employees think of their 401(k) plan allocations in isolation. But if you are married and your spouse works, you are both likely contributing to employee-sponsored plans. And if that is indeed the case, your allocation approaches should be "married" as well. After all, when you retire, you will be living off of both retirement plans as a couple, and following two separate approaches and two separate goals may result in neither goal being met. In addition, some 401(k) plans may offer better investment options than others.

For that reason, married couples should coordinate their approach.

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What exactly is a coordinated approach?

Marrying the Strategy and Options

The first step is to develop an asset allocation strategy for your combined savings, taking into consideration all the risks you will face, including long-term risks such as purchasing power loss, and the significant risks of being too heavily concentrated in one sector, industry or stock.

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Once you have worked out an asset allocation strategy as a couple, you should allocate the investment of your retirement assets by taking full advantage of the choices within the best plan. For most retirement plans, the biggest limitations are the stock investment choices.

Let's look at an example—Lisa and Peter, who were recently married. Both have the same amount in their retirement plans, and both will be making equal contributions in the future.

Lisa's approach to investing her retirement money has been conservative, with only 25% invested in an S&P 500 stock index fund. Peter has been extremely aggressive, investing his entire 401(k) in his company's stock.

After discussing their approaches, they decide a compromise is in order—a greater commitment to stocks than Lisa's original approach, but more diversification than Peter's one-stock commitment. They settle on a 60% stock/40% bond allocation, with not more than 10% of their overall stock commitment invested in the single stock of Peter's employer.

However, looking over their individual retirement plan options, they decide that Lisa's plan clearly offers the better diversified stock investment choice. For that reason, they realize that the best way for them to meet their overall allocation would be to coordinate the allocations of their individual plans.

Peter is confident in his company's future, and wants to retain a portion of his plan in his company stock. However, since his plan's diversified stock fund is not as good as the stock fund in Lisa's plan, the bulk of his plan assets will go to the fixed-income option. His allocation: 25% to his company stock, and 75% to fixed income. Since his plan accounts for half of the couple's retirement plan assets, that means that 12.5% of their combined assets will be invested in his company's stock (half of 25%) and 37.5% of their combined assets will be in fixed income.

Because the couple's entire fixed-income allocation is satisfied within Peter's retirement plan, Lisa's retirement assets will be reallocated so that they are 100% in her plan's diversified stock fund. That means her retirement plan will account for 50% of the couple's stock investment (half of 100%); combined with Peter's 12.5% invested in his company's stock, they have 62.5% invested in stocks. Although their allocation is not exactly 60% stocks and 40% bonds, it is close enough.

A Happy Ending

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Retirement may seem too far off in the distance for young couples to worry about. However, contributions to retirement plans are not distant assets but rather current assets that require current decisions.

Working as a financial team to reach those decisions may or may not lead to a happy marriage, but it will be more financially rewarding.

And that can go a long way toward helping you live happily ever after.


Discussion

Tommy from Texas posted over 3 years ago:

Was looking for a Will or Estate layout or a Chart, if there is such literature.


John Callahan from California posted about 1 year ago:

re: Tommy from Texas request: January 2013
Recommend as a good information source on wills, trusts, estates is book by P. Mark Accettura, esquire.


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