One Income, Two Retirements: How Couples Can Protect Their Future

Key Takeaways

• Look beyond your current household budget.
• Keep workforce reentry options open.
• Capture the full 401(k) match.
• Fund an IRA for the nonearning spouse.
• Hold a year of emergency reserves.
• Coordinate Social Security decisions as a couple.

Valentina Djeljosevic: Hello, I’m Valentina Djeljosevic with Morningstar. Welcome to Retirement Planning for Real Life. Today’s episode will focus on the retirement planning challenges facing single-income couples. I’m here with Christine Benz, Morningstar’s director of personal finance and retirement planning. She’s the co-host of The Long View podcast and author of How to Retire: 20 Lessons for a Happy, Successful and Wealthy Retirement.

The kind we all want. Thank you for being here.

Christine Benz: Nice to see you, Valentina.

Why Are Fewer Couples Living on One Income?

Djeljosevic: I’d like to first talk about the trend. Is this a big chunk of the population, people who are living on a single income?

Benz: Well, it’s a dwindling share of the population. Among married couples, about 50% of them have both partners working. And then, among married couples with children, about 40% of them are living on a single income. That latter statistic is near a record low. It’s a number that we’ve been seeing go down. And the key reason is that obviously the cost of living is going up and up and up. People are emerging from college with a lot of debt. Housing costs are very expensive. And so we’re just seeing that families are having a harder time making it work on a single budget. And then the good news story here is that women’s educational attainment has been going up. They’re graduating from college at higher rates than ever before. They’re emerging from college with some really good jobs. And so many women just don’t want to leave those jobs behind for any period of time. So, they’re staying engaged with their careers. And so that is kind of a silver lining in this story.

Plan Beyond Today’s Financial Needs

Djeljosevic: For couples who get to make this choice, I’m sure they’re wondering, “Can we make it on one income?” But what might they be missing?

Benz: I would say this anecdotally, Valentina, is very much my experience that many people, when they wrestle with this decision, they’re thinking about quality-of-life issues, how busy the household is with two people working. And so they’re focused mainly on the household budget in the here and now: “Can we make this work on that single income?” I would say peer a bit forward into the future if you possibly can, and think about a couple of things. Spend a little time on your retirement plan, how you’re doing in terms of retirement fundedness. It’s probably not top of mind if you’re very busy with children, but give it some thought. Take a look at how you are doing with respect to retirement funding, and how you will be able to do going forward on that single income. So, think about that. And then, importantly, also think about if the spouse who is going to step out of the workforce for any period of time wants to get back in later in life, that can sometimes be a challenge.

I think that sometimes can point to, “Well, maybe I stay in, maybe on a part-time basis or a contract basis, just to keep my skills fresh so that reentry isn’t so difficult.” There are lots of personal considerations swirled in here, but in terms of the finances, yes, focus on the short term and your budget, but also look a little bit forward and think about the future.

How Single-Earner Couples Can Plan for Retirement

Djeljosevic: How can these families make sure they don’t fall behind when it comes to retirement planning?

Benz: Well, the key thing is to make sure that you are continuing to fund the retirement plans at a very minimum as you kind of get your sea legs on the single income. Make sure that you’re at least meeting any matching contributions in the 401(k) plan that are coming in through the employer. If you can make additional contributions to that 401(k) plan and/or continue to fund IRAs, that can be very valuable. Another lever that I think couples should take advantage of is that you can fund an IRA for the nonearning spouse. I don’t want to say nonworking spouse because the spouse who is entrusted with childcare is very much working. But if you’re a nonearning spouse for any period of time, as long as the earning partner has enough income to cover the contribution amount that you’re making, you can fund that spousal contribution. That’s a really nice way for couples to continue to have retirement assets compound, to take advantage of that longer compounding runway that you might have if you’re younger parents.

And then I also love the idea of using reverse budgeting in your household where you’re setting your savings targets, and then you are able to spend anything that’s left over. I think that’s a wonderful strategy for people with tight household budgets, as is often the case for people living on a single income.

Why Single-Income Families Need a Year of Emergency Savings

Djeljosevic: I imagine that emergency funding has to be part of their planning. Why is it especially important for people who are on a single income?

Benz: Very much so. Emergency funding is key for all of us, no matter what our life stage is or family configuration, but it’s especially important for those single-earner households where you just have more financial fragility, frankly. The odds of two people who are working both being knocked out of the workforce at the same time are not especially high, especially if you work in different industries. But if all of your family’s financial fortunes are riding on that one earner, you are more financially fragile, which is why I like to say think about setting aside a year’s worth of anticipated spending in liquid reserves if you are part of a single-income family. And then also look to what might be your next-line reserves. If you had exhausted that dedicated emergency fund but still needed to find cash flow somewhere.

So, if you have permanent life insurance, that often has a cash value attached to it. If you have a home and you have home equity built up, it might be worth lining up a home equity line of credit just to be there as a backstop if you’ve exhausted your direct sources of liquid reserves.

Where to Invest Emergency Funds

Djeljosevic: What are some of those sources of liquid reserves?

Benz: Look at money market funds, CDs, anything that you could readily tap into. You don’t want to think about earmarking it inside of your retirement accounts, where you’ll typically pay taxes and additional penalties if you need to crack into those accounts prior to being of retirement age. So, you need funds in a taxable brokerage account. The good news is that yields are up appreciably versus where they were a couple of years ago. The bad news is taxes; you’re taxed at ordinary income tax rates on those liquid reserves. So, it’s going to take a bite out of the interest that you’re able to earn.

How Single-Income Couples Should Approach Social Security

Djeljosevic: Can you talk about Social Security filing decisions for these single-income households?

Benz: It’s especially important for people in this situation to approach their Social Security filing decisions with deliberation, to not just file as soon as you retire because you want to replace that income you had from working. Approach it as a couple. And so the name of the game is to enlarge your benefits over both partners’ lifetimes. A common configuration for single-earner couples is that the main earner in the household is also a bit older. And it can often be advantageous for that partner, whether male or female, to delay the filing date in order to enlarge the eventual benefit if you predecease your spouse, that the benefit that he or she takes on after your death will be larger. If you’re not conversant in the ins and outs of Social Security, get some help, but definitely approach your filing decisions as a couple.

Djeljosevic: That’s excellent insight. Thank you so much, Christine.

Benz: Thank you so much, Valentina.

Djeljosevic: For more from Christine Benz, be sure to sign up for her free weekly newsletter, Improving Your Finances. Thanks for watching.