A new study, published in the Journal of Financial Planning, finds there may be long-term financial implications when unmarried couples decide to live together.

The findings show that couples who cohabited had less wealth compared with those who never lived together before marriage. The gap in wealth grew significantly for those who cohabited more than once.

“Cohabiting relationships tend to be more short-term and unstable, and you keep starting over every time. That is difficult for wealth generation,” said Dr. Cassandra Dorius, an assistant professor of human development and family studies at Iowa State University.

For the study, researchers from Iowa State and Kansas State universities analyzed data from the 1997 cohort of the National Longitudinal Survey of Youth, which included individuals born between 1980 and 1984. Of the more than 5,000 millennials (ages 28 to 34) in the sample, 45 percent were married, 18 percent were cohabitating and 37 percent were unmarried and not living with anyone.

The findings show that people who were single but had previously lived with someone more than once fared the worst.

Married couples who had never cohabited had a net worth of $39,945 more than single people who had cohabited once; $44,219 more than single people who had cohabited two or more times; $26,927 more than first-time current cohabiters; $33,809 more than current cohabiters who had cohabited before; $16,340 more than currently married couples who had cohabited once; and $18,265 more than currently married couple who had cohabited before.

The study does not investigate why the gap exists, but researchers say instability and lack of legal protections likely contribute to the differences in wealth. Dorius says cohabiting relationships tend to be short-term compared to marriage, and if the relationship ends, assets are not split equally as they are in a divorce.

Dr. Sonya Britt-Lutter, lead author and associate professor of personal financial planning at Kansas State, suggested financial planners ask clients if they are cohabiting, in order to advise them on long-term savings and wealth. She says new client forms only give the option of married, single, divorced or widowed, without recognizing cohabitation.

“Cohabiters are likely to choose ‘single,’ when in reality the planner should advise them more like ‘married.’ This slight distinction makes a difference because cohabiters are gravitating toward non-financial assets versus longer-term financial asset accumulation,” Britt-Lutter said.

The findings show that cohabiting couples are spending money together, but not in the same way as married couples. Rather than buying a house and saving for retirement, cohabiters invest in nonfinancial assets, such as furniture, cars and boats.

Britt-Lutter said thinking of financial counseling and planning services as a regular checkup — similar to going to the doctor or dentist — would help everyone, not just cohabiters.

In addition, cohabiters may be more inclined to invest and save if there is a formal process to protect their assets, Dorius said. A cohabitation agreement, similar to a prenuptial agreement, is a potential solution.

The legal contract would outline how the couple will divide investments and assets if the relationship ends. Since two-thirds of couples live together before marriage, Dorius says it is an option worth exploring.

“There is no reason why we shouldn’t be forward-thinking, acknowledge how cohabitation is affecting wealth and start dealing with it,” Dorius said. “We have to embrace the fact that we are not going back to the days when everyone married at a young age and stayed married. We are in a new world and we need to think about what that means in practical ways.”

Source: Iowa State University