|
Stay-at-home savings plan
|
 |
December 13, 2000: 7:04 a.m. ET
When one spouse leaves a paying job, lifestyle changes are needed
|
NEW YORK (CNNfn) - A dream to stay home to start a family means re-thinking your budget and savings plans. But transitioning to a single-income household can be tough.
In response to a reader's question, Mark Groesbeck, a certified financial planner in Houston, and a member of the Financial Planning Association, suggests you start by cutting out unnecessary expenses.
Ask the experts a question
I am 29 years old and married. My husband and I are both about a year away from finishing school and are presently working full time in promising positions. I have a good job that pays $41,000. My husband is making about $31,000 with good prospects for a promotion in the near future. I currently have $8,500 in my 401(k). I contribute fully to the plan and my employer matches 8 percent, so with my employer's contribution I put aside $8,270 per year. My husband is not yet eligible to participate in his employer's plan, but will become eligible next May, with his employer
matching 13 percent.
Here's my question. We are ready to start a family in a year or so, and I am considering staying at home after giving birth. My dream has always been to be a writer, but I don't have much time to devote to it now with school and work, and I can't see that my time will increase after having a child, so I would like to ditch the 9-to-5 life and write while staying at home. What would you recommend we do to: 1) prepare for making the change from a two-earner family to a one-earner family, and 2) plan for retirement on a single income?
Making the change from a dual-income to a single-income family may require some lifestyle changes. Typically it is easy to spend what you earn. Thus, when one spouse elects to leave the workforce, it becomes difficult to live in the manner to which you have become accustomed. Staying home to start a family is a noble objective that may fit your "value" system and can work if you carefully manage your "financial" systems.
Begin by reviewing your current expenses and itemize those expenses which you will no longer have after graduation. No more tuition, books or
commuting to college will reduce your expenses. If you elect to stay home
with your family you may not have to maintain the same level of wardrobe.
Perhaps you can survive with one car instead of two. Review your budget to
see what other expenses could be reduced. For example, would weekend camping trips be cheaper than a cruise?
Recall also that you have been contributing 8 percent to your 401(k) and 7.65 percent to FICA and Medicare, perhaps 28 percent to federal income tax and 3 percent to state income tax. Thus 46.65 percent of your income was going to retirement savings and taxes. Perhaps carefully managing your expenses can make up for the other 53.35 percent that was net take-home pay.
Once your family moves to a single income, it will become more important for you to have an emergency fund in place. Thus you may want consider
re-directing your 401(k) contributions into a money market account until you
leave the workforce in order to build up your savings. This savings can
ease your lifestyle adjustment if expenses exceed income or could be used
for down payment on a house. However, this recommendation to not make a 401(k) contribution will increase your income taxes. You will need to balance your objectives.
Over time, as your husband's job provides promotions and pay raises, you will be able to replace lost income. A 13 percent match at his job is indeed unusual and contributions should be maximized once he is eligible. As his 401(k) grows you could then take a 401(k) loan (typically up to 50 percent of vested balance) for a down payment on a home or other emergencies.
Once he is eligible to participate, you should contribute as much as you can. If you are not contributing the maximum, then consider the strategy of using annual pay raises as a chance to increase contributions. So if you get a 4 percent raise, consider increasing your 401(k) contribution by 2 percent and then use the balance for lifestyle or other goals.
Preparing for retirement means saving for your future. If you save more over the years you can retire earlier. If you are willing to take more risk and thus get higher returns then this may also allow an earlier retirement. Save what you can in the face of moving to one income, and at least annually update your retirement projection to see if you are on track.
Good luck. 
* Disclaimer
|
|
|
|
|
 |
|
