Newlyweds envision a long, happy life together. Usually, however, those dreams leave out a key detail: How will you pay for it?
Figuring out how to budget for your day-to-day lives together is already tricky, but mapping out a retirement savings plan can seem even more overwhelming.
Whether you're just starting out or part of a couple who has already started saving for retirement, establishing a coordinated retirement plan is an essential task to add to the post-wedding to-do list.
Get a Plan of Attack
First, you'll need to decide where to put your savings and set up accounts for each of you if you haven't already. You have the option to invest pretax dollars in a traditional 401(k) or IRA, or to invest aftertax dollars in a Roth IRA (or Roth 401(k) if your employer offers it).
But don't think of it as an either/or choice; a combination of different types of accounts makes a lot of sense. Saving some assets in a Roth account and some in a traditional account will give you options when it's time to withdraw your money in retirement.
Here's how to execute this approach:
If you're both employed, first check your employer plans, which may be a 401(k), 457, or 403(b), depending on if you work in the private sector, for the government, or for a nonprofit organization. If your employers offer a match, make sure you each contribute at least enough to receive it.
Once you contribute enough to get any employer matching, start a Roth IRA for additional flexibility in retirement (if your employer doesn't offer a match, you may consider starting the Roth right off the bat).
Roth assets have two main advantages: They will be free from required minimum distributions in retirement, and they diversify your tax hit so that you will have a basket of tax-free assets to tap in retirement. IRA contributions are currently limited to $5,000 for individuals under age 50, however, so plan to contribute to your company plan again once you max out your IRA.
Income limits restrict who is eligible to contribute to deductible traditional IRAs and Roth IRAs, but starting in 2010 everyone has the ability to get into a Roth IRA through the back door by converting nondeductible IRA assets (you can open a nondeductible IRA and immediately convert it to a Roth IRA).
It's important that you each have a retirement account, even if one of you isn't working. If only one of you has a retirement account, you miss out on your full allotment of tax-advantaged treatment. Because you can each contribute $5,000 to an IRA, for example, you can receive tax-advantaged treatment for $10,000 if you both have an IRA. The same goes for 401(k)s: In 2010, you can each contribute up to $16,500 if you are under age 50. If you're over age 50, limits are higher for both IRAs and 401(k)s to allow for extra "catch-up" contributions. In addition to being a sensible tax move, it's also a good idea to have retirement savings in your own name in case "happily ever after" turns into "happy for a while."
A spouse without income can contribute to an IRA as long as the couple's income covers the contributions both spouses make (that is, if one person makes at least $10,000 per year, both people can contribute the maximum $5,000).
Check Your Combined Asset Allocation
Once you've figured out what combination of accounts makes sense for you and your spouse, it's time to look at your actual investments.
Now that you're married, there are apt to be at least two retirement accounts to keep on track. Look at your accounts as a whole rather than checking up on each in isolation. Even though the money is being saved in separate wrappers, your accounts should make sense in aggregate.
For couples who already have significant retirement savings, it's particularly important to take inventory of each of your accounts and make sure your investments are streamlined and in step with your spouse's.
Sit down with your spouse and figure out your target asset allocation. The appropriate proportion of stocks, bonds, and cash depends on how long you have until retirement and your joint risk tolerance.
One way to determine an appropriate asset allocation is to look at target-date funds for when you expect to retire. Vanguard and T. Rowe Price target-date funds are good ones to look at for guidance. T. Rowe Price's series tend to be slightly more aggressive, with higher equity allocations.
To see what your combined asset allocation is now and what changes you may need to make, Morningstar Investment Research Center's Portfolio X-Ray is an invaluable tool. Enter your holdings and your spouse's holdings to see your combined distribution between stocks, bonds, and cash, plus your exposure to different sectors and regions. Creating a combined portfolio can also help you see how your different accounts fit together.
You and your spouse's retirement accounts should match your asset-allocation targets when you look at them together. You may have some variation between individual accounts, particularly if you use IRAs to supplement gaps in your company plans, but make sure your holdings come together to form a logical strategy.
Designate Beneficiaries
There is one important step left once you have your accounts on track: designating beneficiaries. Unlike bank and brokerage accounts, retirement accounts cannot be held in both of your names; you each have separate accounts. It is critical to specify who would receive the assets in your account if something were to happen to you.
Beneficiary designations allow the assets to pass directly to the person (or charity trust) you name without going through probate. The beneficiary you name also overrides directions in your will. So, if you want your assets to go to your spouse and not the sister you listed as a beneficiary before you got married, make sure you update your beneficiary information. Avoid naming children as beneficiaries unless they are over the age of majority--18 or 21, depending on the state--because they cannot hold assets in their own names until then.
Morningstar Investment Research Center is great tool for new and veteran investors. It's chock full of unbiased analyst reports, tools for evaluating your portfolio, and lessons on how to invest. The best part is that it's free to all valid library cardholders! Begin now or learn more.
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