In reviewing tax returns for affluent clients, I see a consistent pattern of women not fully funding their retirement plans at work. Why don’t they pay themselves first for the hard work they do both in and out of the office? In many cases it’s simply a matter of not having a plan or of a lack of communication if their partner controls the finances in the relationship.
Let me give you an example. A husband makes a good salary of say more than $150,000. His spouse works at a job she enjoys and earns between $15,000 and $50,000 annually. The husband fully funds his retirement plan, which is capped at $22,000 for workers over 50. The spouse, since her income is lower, contributes up to the maximum of the employer match of perhaps 1-3% of her salary. What if she also contributed the maximum amount of $22,000 per year? She wouldn’t have much, if any, money left in her paycheck, but as a couple they may easily be able to afford to do this. The benefits are that in a 28% tax bracket, an additional $20,000 retirement contribution could mean a tax savings of $5,600! Additionally, she has more money building in her own account resulting in a heightened sense of comfort about the future.
In these instances I often recommend that the husband set up an automatic deposit into his spouses’ bank account to make up the cash flow difference. This eliminates the discomfort of always asking for money. Of course, it’s not always the husband with the higher income. This strategy applies to all couples where the earnings of the husband and wife are not equal. In addition to saving taxes, both spouses are building dollars in their respective retirement plans. In later years, when nursing care costs may arise, both individuals will be more protected and have their own income streams.