The Not-So-Golden Years, Part 1

{3:36 minutes to read} I had a recent mediation that has caused me to consider how to address the future consequences that face a spouse who left the workforce for many years during the time of the marriage.

In this case, the wife had taken on the role of primary caretaker of the couple’s children. As a result, she left the workforce when the children were born and, when she returned to work many years later, she was only able secure employment that paid her about $40,000 a year. This job also did not provide a 401(k) for the employees, although she has been able to set up an IRA that now has about $10,000 in it.

The husband was the primary breadwinner during the marriage and, partly because he remained in the workforce, now earns $120,000 per year. He also has about $200,000 in a 401(k) that was established by his employer.

Another concern was that, since Social Security benefits are determined by the income earned over a 35-year period, the wife’s benefit would be significantly less than that of the husband.

While she could, as a spouse who had been married for over 10 years, receive a benefit based upon the husband’s earnings, this is only 50% of his benefit. (See my prior blog post, “Social Insecurity”.)

Here is why I am concerned about the wife’s “Golden Years”:

Let’s say they agree to divide the retirement accounts equally. The wife would receive $95,000 from his 401(k) that she can roll into her IRA. But because she has only an IRA, she can contribute only $5,500 to her own retirement account in the future until she is over age 50 when she can contribute up to $6,500 per year.

On the other hand, since the husband’s company offers a 401(k), he can contribute as much as $18,000 per year into his retirement account. And once he is over age 50, he can contribute up to $24,000 per year. If his company matches his contribution, he can receive an additional contribution from his employer of 5% of his salary, or $6,000 per year.

If we look at what this would mean over a 10-year period, assuming they are both over age 50, the husband would be able to add $300,000 to his retirement account ($30,000 per year for 10 years) while the wife would only be able to add $65,000 over the same period. And when you factor in the gains (interest) on each account and the tax benefits, the difference becomes even more significant.

In Part 2, I share a couple of ideas I have on how we may be able to address this inequity.