Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

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ICMoney
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Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Sat Dec 23, 2017 5:07 pm

We have young kids ranging from ages 0 to 7 and are planning for mom to start staying at home with them within the next 1.5 years. We are trying to decide what to do financially in the next 6-12 months to best position ourselves for this change - in particular what to do with the mortgage so that we can make our expenses work on one salary in the future while still saving at a meaningful level on one salary going forward. Mom may go back to work someday, but unless she reentered the same field within the next 5 years it wouldn't be at her current salary level - probably best to assume for this purpose that future earnings would be limited for her. Please see our financial information and expenses below:

Emergency funds: 2 months of expenses (we see Roth IRAs as extra e-funds in addition, current basis in Roth IRAs is $23K and will be $63K in 2019)
Debt: $140K @ 3.25% mortgage, 15yr fixed (about 6 months in), $1000/mo. House is worth about $350K.
Tax Filing Status: MFJ
Tax Rate: 22% Federal, 5% State
Age: 38/36
Income: $84K him, $80K her (part-time)

Current retirement assets

Size of the portfolio: $475K

His TSP
11% G fund (.04%)

Her 401k
9% International index (.08%)
17% US Large cap index (.01%)

Her Roth 401k
4% International index (.08%)
6% US Large cap index (.01%)

His Roth IRA at Vanguard
5% Vanguard Total Stock Market VTSAX (.04%)

Her Roth IRA at Vanguard
13% Vanguard Total Stock Market VTSAX (.04%)
15% Vanguard Total Bond Market VBTLX (.05%)

Her Traditional IRA at Vanguard
5% Vanguard Total Stock Market VTSAX (.04%)
3% Vanguard FTSE All World ex-US VFWAX (.11%)
3% Vanguard Total Bond Market VBTLX (.05%)

Her Cash Balance Pension
6%

Her HSA
3% Vanguard Total Stock Market VTSAX (.04%)


New *possible* annual Contributions
$18,500 his 401k (plus 5% employer matching contributions)
$18,500 her 401k (plus 7% employer matching contributions)
$5,500 his IRA/Roth IRA
$5,500 her IRA/Roth IRA
$6,900 her HSA
$20,000 her mega backdoor Roth


No college savings for the kids, we are planning to cash flow this or use Roths when it comes.


Expenses - annual approximately $60K
House insurance 1900
House taxes 6400
House maintenance 1000
Lawn care 1000
HOA dues 125
Mortgage 12,000
Car insurance and licensing 1800
Car maintenance 500
Life insurance ($500K/ea term 25 years remaining non-employer policies, this is in addition to 5x salary each at current employers) 1300
Gas 1800
Clothing 500
Grocery 8400
Personal care 360
Her Own-Occ Disability income insurance 1700 (cannot get own-occ disability insurance on Him which we realize is a potential issue, there is an any-occ disability benefit under His FERS though)
Childcare 2040
Date night 1800
Restaurant - other 900
Utilities 2400
Internet 480
Phone 360
Kids activities 2400
Gym 600
Giving 8000
Other 2400



Questions:
1. Our expenses won't allow for much retirement savings going forward - we'd only have about $14K to put towards TSP/HSA/IRAs per year. Should we throw as much of her salary over the next year at the mortgage as possible? Before she stops working, we could then request a recast to get monthly mortgage payment down to a more comfortable level that would still allow us to max HSA and TSP (the thinking is to prefer TSP to IRAs in order to get as much G-Fund as possible, is that a good move?). We wouldn't be able to contribute much if anything to IRAs on one salary most likely.

2. How much of her salary should we put in retirement savings over the next 1-1.5 years? Just the minimum to get the 401k match plus maxing HSA, maxing her traditional 401k+HSA (which is preferable from a tax perspective because would defer more of her salary), or all of these plus maxing mega backdoor roth? The idea would be to throw any excess at the mortgage in order to recast, or something else - what might "something else" be? Would it be a bad idea to forego mega backdoor Roth and/or other of her savings opportunities so we have more to put towards the mortgage, in order to make our monthly cash flow on one salary (with a recast) look better? I realize mega backdoor Roth is a great opportunity but maybe those dollars could be better used elsewhere?

3. Once mom stops working, we will do Roth conversions of her traditional retirement accounts over a period of 4-5 years to get us the max $2000/child tax credit each year (which will take us a bit into the 22% tax bracket, because if we just convert to the top of the 12% bracket then we get a lower refundable child tax credit). Then all retirement monies will be in Roths except for TSP, we'd plan to start doing Roth TSP at that point. Any issues with this plan?

4. Any red flags you see that we need to shore up over the next 1.5 years as we prepare for this change in our family?

Thanks for your time and thoughts on our situation.

Best,
ICM

LeeMKE
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by LeeMKE » Sat Dec 23, 2017 5:40 pm

1. Our expenses won't allow for much retirement savings going forward - we'd only have about $14K to put towards TSP/HSA/IRAs per year. Should we throw as much of her salary over the next year at the mortgage as possible? Before she stops working, we could then request a recast to get monthly mortgage payment down to a more comfortable level that would still allow us to max HSA and TSP (the thinking is to prefer TSP to IRAs in order to get as much G-Fund as possible, is that a good move?). We wouldn't be able to contribute much if anything to IRAs on one salary most likely.
One idea to consider is asking your bank about an ARM. Would they provide a no/low-cost conversion? Just tell them Mom is planning on staying home so you want lower payments. You have enough equity they won't be concerned about the mortgage ratio, and they'd rather accommodate a new loan than have you strapped to make their payments. Doubly so if they are holding your mortgage, which they may well be with your ratio.
If so, the flexibility you seek could be created now: lower minimum monthly payment because the intro interest rate will be lower and the term longer. Then pre-pay during this preparatory period. This will submerge the required minimum payment (if Mom stays out of the work force more than 5 years) when rate adjustments start. Do not tell your bank you plan to make prepayments. This ruins their ROI, so a smart banker would let the loan committee know and they'd adjust terms against you.
2. How much of her salary should we put in retirement savings over the next 1-1.5 years? Just the minimum to get the 401k match plus maxing HSA, maxing her traditional 401k+HSA (which is preferable from a tax perspective because would defer more of her salary), or all of these plus maxing mega backdoor roth? The idea would be to throw any excess at the mortgage in order to recast, or something else - what might "something else" be? Would it be a bad idea to forego mega backdoor Roth and/or other of her savings opportunities so we have more to put towards the mortgage, in order to make our monthly cash flow on one salary (with a recast) look better? I realize mega backdoor Roth is a great opportunity but maybe those dollars could be better used elsewhere?
Cash flow is king. Fix the issues on your monthly cash flow first, then tackle what you can with the time and funds remaining.
  • I would fix the mortgage with an ARM refi right away if you can get it at a low/no cost.
  • Second, shelter income with contributions.
  • I'd skip the mega-backdoor Roth for now. You have enough in your portfolio for your ages, and there will be opportunities to convert to Roth later.
3. Once mom stops working, we will do Roth conversions of her traditional retirement accounts over a period of 4-5 years to get us the max $2000/child tax credit each year (which will take us a bit into the 22% tax bracket, because if we just convert to the top of the 12% bracket then we get a lower refundable child tax credit). Then all retirement monies will be in Roths except for TSP, we'd plan to start doing Roth TSP at that point. Any issues with this plan?
Sounds like a great plan to me. Very smart thinking.
4. Any red flags you see that we need to shore up over the next 1.5 years as we prepare for this change in our family?
Great to see you planning in advance. Good thinking, and a good plan!
The mightiest Oak is just a nut who stayed the course.

PFInterest
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by PFInterest » Sat Dec 23, 2017 6:08 pm

Beef up EF. I would not dare touch my Roth.

aristotelian
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by aristotelian » Sat Dec 23, 2017 6:11 pm

Congrats on your 0 year old! I am impressed that you are able to spend $1800 on date nights with young kids.

No budget for OOP health expenses. Are you planning to draw on the HSA? You have the HSA invested so that doesn't make sense.

Also no budget for vacation. Do you never travel? With kids those plane tickets add up.

Personally, I would take a portion of the charitable donations and open a 529.

I would build up a large cash position to give you some flexibility when she goes SAH. That is going to be a big change to your cash flow, so a bigger emergency fund will be useful.

IMO
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by IMO » Sat Dec 23, 2017 6:34 pm

ICMoney wrote:
Sat Dec 23, 2017 5:07 pm
Income: $84K him, $80K her (part-time)
From a financial standpoint, maybe you should consider a SAHD vs. a SAHM

mouses
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by mouses » Sat Dec 23, 2017 7:26 pm

IMO wrote:
Sat Dec 23, 2017 6:34 pm
ICMoney wrote:
Sat Dec 23, 2017 5:07 pm
Income: $84K him, $80K her (part-time)
From a financial standpoint, maybe you should consider a SAHD vs. a SAHM
And have the Mom work full time? That sounds more comfortable financially. The current plan seems a little precarious.

runner540
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by runner540 » Sat Dec 23, 2017 7:47 pm

mouses wrote:
Sat Dec 23, 2017 7:26 pm
IMO wrote:
Sat Dec 23, 2017 6:34 pm
ICMoney wrote:
Sat Dec 23, 2017 5:07 pm
Income: $84K him, $80K her (part-time)
From a financial standpoint, maybe you should consider a SAHD vs. a SAHM
And have the Mom work full time? That sounds more comfortable financially. The current plan seems a little precarious.
+1
Maybe if Dad is on a fast upward income trajectory, it would be a tossup.

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fortfun
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by fortfun » Sat Dec 23, 2017 7:48 pm

As someone else stated, I'd put some or all of that giving into 529s. When mom returns to work, return to giving donations. We were in a similar position as you are now. My wife felt guilty about not becoming a stay at home mom--mom's put a lot of pressure on themselves. In the end, we could not afford it. She cut back on her hours and worked a lot from home. I actually think it was good for her sanity and our income (and retirement) in the end. So, I guess I would make sure mom is not doing it out of feeling like it is the only way she can be a great mom. It's a personal decision for everyone. As others have said, get the emergency fund built up a bit. I don't think I'd put any extra money toward the mortgage at this point (wait till mom goes back to work). Congratulations and good luck!

evilityb
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by evilityb » Sat Dec 23, 2017 7:55 pm

A few questions before I give my input:

1) You're contributing to a TSP. How many years are you vested in the Pension? Do you plan on staying with the Federal Government for the duration of your career?

2) What is driving Mom to be a SAHM?

3) Would Dad like to be a SAHD?

4) What is your ultimate financial goal for retirement?
Make sure the fortune that you seek is the fortune that you need - Ben Harper

onourway
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by onourway » Sat Dec 23, 2017 8:42 pm

Red flags I see are shortage of emergency funds - once you go to single income you greatly increase your risk from job loss. I would want 6 months here minimum. The other one is budgeting $1000/year for house maintenance. I don't think that's realistic, and with your expenses consuming all of your income, you won't have any breathing room when something inevitably comes up with the house. I agree that the giving budget should get cut to cover some of these other things - including some college savings.

Otherwise, I would personally not be throwing extra money at the mortgage in the next year and a half. It's a good interest rate, only 15 years, and not for that much money. You need to beef up your cash reserves. Cash converted to home equity becomes much less liquid.

James1
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by James1 » Sun Dec 24, 2017 12:03 am

We were in a similar situation in our early 30's. The best advice we received before making the transition was to pretend the soon-to-be SAH income didn't exist. We even had the income deposited in a separate account. See what it is like to live on 1 income and save the rest in retirement accounts and for a larger emergency fund.

Why wait for 1.5 years? What is driving this change?

You may want to consider how the change in income will effect your taxes, health insurance and ultimately budget.
1. Currently, if you are in an expanded Medicaid state, your kids (and possibly wife) will qualify for free healthcare (including no copays).
2. You can easily change your savings/contributions to pay close to $0 federal taxes. If this is potentially a permanent change, your tax bracket may stay low and make conversions less appealing.
3. How much are you willing to trim the budget to reach your savings goal?

Katietsu
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by Katietsu » Sun Dec 24, 2017 12:20 am

I am not sure why the focus on the mortgage. It is a good rate and you have not even had it long.

If your concern is retirement savings just do that now. I would especially max out the tax deductible savings while your income is higher. And I agree with others who suggest that you need to increase your readily accessible savings as you prepare for such a significant transition.

It has always been my understanding that if you are not working, with the exception prion of a very temporary period, that you would be unable to make a apply for disability claim. So, at some point, you need to consider whether the disability insurance should be dropped.

Have you estimated your expenses once your wife is home? For instance, will you be able to reduce expenses such as lawn care, restaurants and child activities? Will you reduce your charitable giving with a lower salary? Every decision is a trade off as you have already discovered

OldSport
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by OldSport » Sun Dec 24, 2017 12:41 am

mouses wrote:
Sat Dec 23, 2017 7:26 pm
IMO wrote:
Sat Dec 23, 2017 6:34 pm
ICMoney wrote:
Sat Dec 23, 2017 5:07 pm
Income: $84K him, $80K her (part-time)
From a financial standpoint, maybe you should consider a SAHD vs. a SAHM
And have the Mom work full time? That sounds more comfortable financially. The current plan seems a little precarious.
I would strongly reconsider having Mom stay at home full-time with a salary split like that.

It looks like Mom has extremely good earning potential to be making $80k part-time. $164k household income is a very solid comfortable upper middle class income. $84k is not.

If the family really needs more at-home time with the kids, I would consider Mom working less hours, working from home (if this is possible), or even a SAHD, if Mom can make a lot more than $80k full-time.

I don't know all the specifics and reasons for doing this, but I would strongly reconsider, as it would be a dramatic lifestyle change.

If my DS and I were that balanced income, we would never consider cutting our income in half like that.

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Watty
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by Watty » Sun Dec 24, 2017 12:46 am

ICMoney wrote:
Sat Dec 23, 2017 5:07 pm
Age: 38/36
Income: $84K him, $80K her (part-time)

Current retirement assets

Size of the portfolio: $475K
It sounds like you have pretty modest expenses since you can live one income of $84K with a mortgage payment and several kids living at home.

Unless you are planning on very early retirement then I don't know that you really need to do the massive retirement savings that you were planning. I didn't crunch the numbers but if you work the next 20 years and leave that $475K invested and just contribute enough to get the employer 401k match then you should have pretty hefty retirement savings. It would be good to run the numbers to figure out if you really need a lot more retirement savings.

If not that paying down the mortgage to get it paid off by the time the first kid starts college might make sense.

OldSport
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by OldSport » Sun Dec 24, 2017 12:49 am

If for whatever reason, I had to take a life changing paycut like that, I would dramatically lower my discretionaty (non-mortgage) monthly costs to fit that one income, and save ever penny of the second income while it was still there. I would pay off any non-mortgage debt, and then save every bit exta from the second income in something like a Vanguard Wellesley or Global Wellesley and use it as an extra income stream.

Lastly, I would work like heck to increase the remaining income. I know from experience it is so much harder for one income to make $164k than 2.

LeeMKE
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by LeeMKE » Sun Dec 24, 2017 12:57 am

Funny, but I didn't see any questions from the OP about their personal decision about SAHM. Maybe we should assume they have considered all their options and now are seeking help with the questions they posed, and not with their personal choices otherwise?
The mightiest Oak is just a nut who stayed the course.

ICMoney
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Sun Dec 24, 2017 6:45 am

LeeMKE wrote:
Sat Dec 23, 2017 5:40 pm
1. Our expenses won't allow for much retirement savings going forward - we'd only have about $14K to put towards TSP/HSA/IRAs per year. Should we throw as much of her salary over the next year at the mortgage as possible? Before she stops working, we could then request a recast to get monthly mortgage payment down to a more comfortable level that would still allow us to max HSA and TSP (the thinking is to prefer TSP to IRAs in order to get as much G-Fund as possible, is that a good move?). We wouldn't be able to contribute much if anything to IRAs on one salary most likely.
One idea to consider is asking your bank about an ARM. Would they provide a no/low-cost conversion? Just tell them Mom is planning on staying home so you want lower payments. You have enough equity they won't be concerned about the mortgage ratio, and they'd rather accommodate a new loan than have you strapped to make their payments. Doubly so if they are holding your mortgage, which they may well be with your ratio.
If so, the flexibility you seek could be created now: lower minimum monthly payment because the intro interest rate will be lower and the term longer. Then pre-pay during this preparatory period. This will submerge the required minimum payment (if Mom stays out of the work force more than 5 years) when rate adjustments start. Do not tell your bank you plan to make prepayments. This ruins their ROI, so a smart banker would let the loan committee know and they'd adjust terms against you.
Thank you for the idea - we hadn't considered an ARM, but will keep this in mind as we get closer to mom's stop working date as an option for the mortgage payment.

ICMoney
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Sun Dec 24, 2017 6:47 am

PFInterest wrote:
Sat Dec 23, 2017 6:08 pm
Beef up EF. I would not dare touch my Roth.
Thanks PFInterest - I wondered if someone would mention this, so appreciate the encouragement to bring this up vs. other priorities.

ICMoney
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Sun Dec 24, 2017 6:52 am

aristotelian wrote:
Sat Dec 23, 2017 6:11 pm
Congrats on your 0 year old! I am impressed that you are able to spend $1800 on date nights with young kids.

No budget for OOP health expenses. Are you planning to draw on the HSA? You have the HSA invested so that doesn't make sense.

Also no budget for vacation. Do you never travel? With kids those plane tickets add up.

Personally, I would take a portion of the charitable donations and open a 529.

I would build up a large cash position to give you some flexibility when she goes SAH. That is going to be a big change to your cash flow, so a bigger emergency fund will be useful.
We have a few thousand of the HSA not invested (not included in the %s), and can always sell off the HSA investments if needed. So that is essentially our health emergency fund. We also plan to continue contributing to an HSA. Does that make sense?

We have some low-cost travel options available and I didn't think to include it since we haven't traveled with young kids - but agree that makes sense for the future. We do plan to use rewards points to keep the travel cost manageable as well.

Will consider the shift of charitable to 529, but we do consider charitable a priority so will have to weigh whether and how much to decrease that by.

Thanks aristotelian.

ICMoney
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Sun Dec 24, 2017 7:05 am

mouses wrote:
Sat Dec 23, 2017 7:26 pm
IMO wrote:
Sat Dec 23, 2017 6:34 pm
ICMoney wrote:
Sat Dec 23, 2017 5:07 pm
Income: $84K him, $80K her (part-time)
From a financial standpoint, maybe you should consider a SAHD vs. a SAHM
And have the Mom work full time? That sounds more comfortable financially. The current plan seems a little precarious.
Yes, we have considered this since it would make more sense from a financial standpoint, on paper at least. Dad prefers to work and likes his job, and mom has a desire to stay home with the kids, at least for a couple years. Her job satisfaction is much lower than his as well, though maybe that would improve with a job change. She wants to be part-time to maintain balance in our family life which does limit options. We will probably look into independent contracting for her but a clean break for awhile will be good for her in our opinion, so not going to push having her do contract work either.

ICMoney
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Sun Dec 24, 2017 7:06 am

fortfun wrote:
Sat Dec 23, 2017 7:48 pm
As someone else stated, I'd put some or all of that giving into 529s. When mom returns to work, return to giving donations. We were in a similar position as you are now. My wife felt guilty about not becoming a stay at home mom--mom's put a lot of pressure on themselves. In the end, we could not afford it. She cut back on her hours and worked a lot from home. I actually think it was good for her sanity and our income (and retirement) in the end. So, I guess I would make sure mom is not doing it out of feeling like it is the only way she can be a great mom. It's a personal decision for everyone. As others have said, get the emergency fund built up a bit. I don't think I'd put any extra money toward the mortgage at this point (wait till mom goes back to work). Congratulations and good luck!
Thanks fortfun - good to know your experience and I an starting to like the idea of using excess funds for a bigger emergency fund and possibly 529s instead of the mortgage as we prepare for this.

ICMoney
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Sun Dec 24, 2017 7:18 am

evilityb wrote:
Sat Dec 23, 2017 7:55 pm
A few questions before I give my input:

1) You're contributing to a TSP. How many years are you vested in the Pension? Do you plan on staying with the Federal Government for the duration of your career?

4) What is your ultimate financial goal for retirement?
1. Dad's FERS service is 5 years, so I think that means vested. Plans on staying with the federal government for his whole career and is in a very stable job there.

4. His FERS annuity at 30 years of service would be about $35K in today's dollars based on the salary those close to retirement are currently making in his field. Above that, generating an additional $20-30K/year from the portfolio/other sources would be nice but we could get by with less if needed. We should be able to continue FEHB in retirement so health insurance would be available. We realize that job loss/health issues/death/disability are risks to this plan so don't want to discount those possibilities either.

Basically, we want to be able to comfortably afford retirement without being a burden to our kids. We want to be able to visit them and spoil them a little too. We don't have plans to travel extensively and are not big spenders.

ICMoney
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Sun Dec 24, 2017 7:20 am

onourway wrote:
Sat Dec 23, 2017 8:42 pm
Red flags I see are shortage of emergency funds - once you go to single income you greatly increase your risk from job loss. I would want 6 months here minimum. The other one is budgeting $1000/year for house maintenance. I don't think that's realistic, and with your expenses consuming all of your income, you won't have any breathing room when something inevitably comes up with the house. I agree that the giving budget should get cut to cover some of these other things - including some college savings.

Otherwise, I would personally not be throwing extra money at the mortgage in the next year and a half. It's a good interest rate, only 15 years, and not for that much money. You need to beef up your cash reserves. Cash converted to home equity becomes much less liquid.
Thanks for echoing other posters' thoughts, it's helpful to hear the chorus that the mortgage shouldn't be a priority over some of these other things.

ICMoney
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Sun Dec 24, 2017 7:28 am

James1 wrote:
Sun Dec 24, 2017 12:03 am
We were in a similar situation in our early 30's. The best advice we received before making the transition was to pretend the soon-to-be SAH income didn't exist. We even had the income deposited in a separate account. See what it is like to live on 1 income and save the rest in retirement accounts and for a larger emergency fund.

Why wait for 1.5 years? What is driving this change?

You may want to consider how the change in income will effect your taxes, health insurance and ultimately budget.
1. Currently, if you are in an expanded Medicaid state, your kids (and possibly wife) will qualify for free healthcare (including no copays).
2. You can easily change your savings/contributions to pay close to $0 federal taxes. If this is potentially a permanent change, your tax bracket may stay low and make conversions less appealing.
3. How much are you willing to trim the budget to reach your savings goal?
We just feel like it's a good time to have mom stay at home, we have been saving as she's worked the past few years and while dad was in grad school and want her to have some of this time with the kids while they are still young. We wanted to wait 1.5 years to get another year or so of her income to make this change more feasible, but we are ok having her stop sooner too.

We get health insurance through FEHB so no issues there. We are ok trimming the budget but I don't think there's any obvious trimming room except for the giving as others have pointed out (and not sure how much we want to trim that, will need to think about that...).

Thanks for sharing your experience with a similar decision as well.

aristotelian
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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by aristotelian » Sun Dec 24, 2017 7:36 am

ICMoney wrote:
Sun Dec 24, 2017 6:52 am

We have a few thousand of the HSA not invested (not included in the %s), and can always sell off the HSA investments if needed. So that is essentially our health emergency fund. We also plan to continue contributing to an HSA. Does that make sense?

We have some low-cost travel options available and I didn't think to include it since we haven't traveled with young kids - but agree that makes sense for the future. We do plan to use rewards points to keep the travel cost manageable as well.

Will consider the shift of charitable to 529, but we do consider charitable a priority so will have to weigh whether and how much to decrease that by.

Thanks aristotelian.
If you use the HSA for health expenses, I would invest it more conservatively. Consider putting new contributions into an HSA savings account or bond fund.

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Sun Dec 24, 2017 8:05 am

OldSport wrote:
Sun Dec 24, 2017 12:41 am

I would strongly reconsider having Mom stay at home full-time with a salary split like that.

It looks like Mom has extremely good earning potential to be making $80k part-time. $164k household income is a very solid comfortable upper middle class income. $84k is not.

If the family really needs more at-home time with the kids, I would consider Mom working less hours, working from home (if this is possible), or even a SAHD, if Mom can make a lot more than $80k full-time.

I don't know all the specifics and reasons for doing this, but I would strongly reconsider, as it would be a dramatic lifestyle change.

If my DS and I were that balanced income, we would never consider cutting our income in half like that.
Thanks oldsport. We sort of realize it will be a lifestyle change, to the extent possible without having officially gone to one income yet. We have been saving about 50% of income the past 2 years but not having the cushion of two incomes will be a shift for sure. We were hoping we have enough of a head start on retirement savings and a low enough mortgage to make this feasible since we feel it would be a good opportunity for our family in the near term. Thanks for giving me some things to think about.

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Sun Dec 24, 2017 8:51 am

Katietsu wrote:
Sun Dec 24, 2017 12:20 am
I am not sure why the focus on the mortgage. It is a good rate and you have not even had it long.

If your concern is retirement savings just do that now. I would especially max out the tax deductible savings while your income is higher. And I agree with others who suggest that you need to increase your readily accessible savings as you prepare for such a significant transition.

It has always been my understanding that if you are not working, with the exception prion of a very temporary period, that you would be unable to make a apply for disability claim. So, at some point, you need to consider whether the disability insurance should be dropped.

Have you estimated your expenses once your wife is home? For instance, will you be able to reduce expenses such as lawn care, restaurants and child activities? Will you reduce your charitable giving with a lower salary? Every decision is a trade off as you have already discovered
Thanks katietsu - I am just risk averse so overly focus on the mortgage being gone, but it's good to have the bogleheads bring me back to remembering it's ok to have the mortgage in order to allow for flexibility elsewhere. Or that overly focusing on the mortgage has more of a risk of derailing our plan here.

Will look into the disability insurance issue as well - we recall when getting the policy that it would pay out regardless, but will need to check to see if we'd need to prove recent income for it to pay out.

Our expenses shouldn't change much with a SAHM (I don't think), but the areas you identified would be good places we could trim if things got tight. If anything I only see our child activities budget increasing as they age - they seem fairly inexpensive now to be honest. I'm definitely on board now with throwing excess income (while we have it) towards a larger emergency fund too.

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by Dottie57 » Sun Dec 24, 2017 8:52 am

I think the own occ disability insurance for her will no longer make sense as a SAHM. i really don't think an insurance company would pay out for some one not receiving income on from their occupation. I would certainly check with the i surance company.

Disability ins is income replacement.

There are other expenses that are not must haves.
Childcare should not be needed.
Date night reduced.
Restaurants reduced.
Other reduced.

With less income you need to reduce spending.

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Sun Dec 24, 2017 9:06 am

Watty wrote:
Sun Dec 24, 2017 12:46 am
ICMoney wrote:
Sat Dec 23, 2017 5:07 pm
Age: 38/36
Income: $84K him, $80K her (part-time)

Current retirement assets

Size of the portfolio: $475K
It sounds like you have pretty modest expenses since you can live one income of $84K with a mortgage payment and several kids living at home.

Unless you are planning on very early retirement then I don't know that you really need to do the massive retirement savings that you were planning. I didn't crunch the numbers but if you work the next 20 years and leave that $475K invested and just contribute enough to get the employer 401k match then you should have pretty hefty retirement savings. It would be good to run the numbers to figure out if you really need a lot more retirement savings.

If not that paying down the mortgage to get it paid off by the time the first kid starts college might make sense.
Thanks, Watty. FIREcalc shows a 100% success rate with a 22 year working future, $475K starting portfolio and $10K per year of retirement savings and a 40 year time horizon for retirement. This is even without the FERS annuity and Social Security. So maybe we are in an ok position here as you guessed?

We plan to have the mortgage paid off by the time the oldest is in college to help us cash flow any college costs.

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by Watty » Sun Dec 24, 2017 9:16 am

ICMoney wrote:
Sat Dec 23, 2017 5:07 pm
We have young kids ranging from ages 0 to 7....
How many kids do you have?
ICMoney wrote:
Sat Dec 23, 2017 5:07 pm
1. Our expenses won't allow for much retirement savings going forward - we'd only have about $14K to put towards TSP/HSA/IRAs per year. Should we throw as much of her salary over the next year at the mortgage as possible? Before she stops working, we could then request a recast to get monthly mortgage payment down to a more comfortable level that would still allow us to max HSA and TSP (the thinking is to prefer TSP to IRAs in order to get as much G-Fund as possible, is that a good move?). We wouldn't be able to contribute much if anything to IRAs on one salary most likely.
With the employer match you would still be saving about $18K a year and with your current saving that is still very good even though it is not the mega savings that you have been doing.
ICMoney wrote:
Sat Dec 23, 2017 5:07 pm
2. How much of her salary should we put in retirement savings over the next 1-1.5 years? Just the minimum to get the 401k match plus maxing HSA, maxing her traditional 401k+HSA (which is preferable from a tax perspective because would defer more of her salary), or all of these plus maxing mega backdoor roth? The idea would be to throw any excess at the mortgage in order to recast, or something else - what might "something else" be? Would it be a bad idea to forego mega backdoor Roth and/or other of her savings opportunities so we have more to put towards the mortgage, in order to make our monthly cash flow on one salary (with a recast) look better? I realize mega backdoor Roth is a great opportunity but maybe those dollars could be better used elsewhere?

3. Once mom stops working, we will do Roth conversions of her traditional retirement accounts over a period of 4-5 years to get us the max $2000/child tax credit each year (which will take us a bit into the 22% tax bracket, because if we just convert to the top of the 12% bracket then we get a lower refundable child tax credit). Then all retirement monies will be in Roths except for TSP, we'd plan to start doing Roth TSP at that point. Any issues with this plan?
If the new tax laws are still in effect when you retire then you will have a $24,000 standard deduction plus a bit more when you are over 65 so even though the details are more complicated you really want to have that much taxable income in retirement since it will be taxed at zero percent. Doing thing like mega backdoor Roths or future Roth contributions when you can when there is no cost is great but I would be cautious about choosing Roths over traditional deductible retirement accounts if there is any tax cost to do that.

When you are down to one income there is a good chance that you will qualify for a partial Retirement Savings Contribution Credit since the income numbers that determine that are after a lot of payroll deductions including(I think) 401k contributions.

https://www.irs.gov/retirement-plans/pl ... ers-credit

A problem with that is that if you have to dip into one of your Roth accounts for some large expense then that could cause you to lose that credit since distributions from the retirement accounts are subtracted out on form 8880 which is used to calculate this credit.

For flexibility and to avoid the Roth withdrawals later on for the next 1.5 years while the wife is still working just putting some money into a taxable account after you have maxed out your deductible retirement accounts would be an option to consider. When you are down to one income you could use that money to make Roth contributions later if you decided you don't need it in the taxable account.
ICMoney wrote:
Sat Dec 23, 2017 5:07 pm
4. Any red flags you see that we need to shore up over the next 1.5 years as we prepare for this change in our family?
It would be good to plan a budget for cars and set aside a money in a car fund for eventually replacing cars as they are needed since that will be a lot more difficult when you are down to one income.
ICMoney wrote:
Sat Dec 23, 2017 5:07 pm
Mom may go back to work someday, but unless she reentered the same field within the next 5 years it wouldn't be at her current salary level - probably best to assume for this purpose that future earnings would be limited for her.
What line of work is the wife in? If she reenters the field at reduced pay in the future would it be at something like half her current income where she could still make $40K for part time worK? If so that is still real good pay and a lot different than her having few marketable skills if she is out of the job market for ten years.

I totally understand her wanting to be a stay at home mom but I have seen way too many situations where a woman ended up having to go back to work even though she didn't plan to. No one plans on a death, divorce, disability, husband having a drug or alcohol problem, the husband having mental problems that impacts his ability to work like severe depression, etc. Things like this can happen even in "good" families so don't assume that it can't happen to you.

Giving up her current income to stay at home is personal choice with no one right or wrong answer but I would urge her to be extremely cautious about giving up her future earning power.
ICMoney wrote:
Sat Dec 23, 2017 5:07 pm
Life insurance ($500K/ea term 25 years remaining non-employer policies, this is in addition to 5x salary each at current employers) 1300
So that is $900K in life insurance on the husband. You may need more depending on how able the wife will be reenter the workforce if the husband dies.

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Sun Dec 24, 2017 9:51 am

aristotelian wrote:
Sun Dec 24, 2017 7:36 am

If you use the HSA for health expenses, I would invest it more conservatively. Consider putting new contributions into an HSA savings account or bond fund.
Thanks - we had stopped investing contributions about 6 months ago to build more of a cash cushion in the HSA, so agree it makes sense to continue to build a conservative cushion in the HSA for health expenses. Luckily everyone has been relatively healthy for a number of years so our health costs have been low.

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Sun Dec 24, 2017 11:07 am

Watty wrote:
Sun Dec 24, 2017 9:16 am
If the new tax laws are still in effect when you retire then you will have a $24,000 standard deduction plus a bit more when you are over 65 so even though the details are more complicated you really want to have that much taxable income in retirement since it will be taxed at zero percent. Doing thing like mega backdoor Roths or future Roth contributions when you can when there is no cost is great but I would be cautious about choosing Roths over traditional deductible retirement accounts if there is any tax cost to do that.

When you are down to one income there is a good chance that you will qualify for a partial Retirement Savings Contribution Credit since the income numbers that determine that are after a lot of payroll deductions including(I think) 401k contributions.

https://www.irs.gov/retirement-plans/pl ... ers-credit

A problem with that is that if you have to dip into one of your Roth accounts for some large expense then that could cause you to lose that credit since distributions from the retirement accounts are subtracted out on form 8880 which is used to calculate this credit.

For flexibility and to avoid the Roth withdrawals later on for the next 1.5 years while the wife is still working just putting some money into a taxable account after you have maxed out your deductible retirement accounts would be an option to consider. When you are down to one income you could use that money to make Roth contributions later if you decided you don't need it in the taxable account.
ICMoney wrote:
Sat Dec 23, 2017 5:07 pm
4. Any red flags you see that we need to shore up over the next 1.5 years as we prepare for this change in our family?
It would be good to plan a budget for cars and set aside a money in a car fund for eventually replacing cars as they are needed since that will be a lot more difficult when you are down to one income.
ICMoney wrote:
Sat Dec 23, 2017 5:07 pm
Mom may go back to work someday, but unless she reentered the same field within the next 5 years it wouldn't be at her current salary level - probably best to assume for this purpose that future earnings would be limited for her.
What line of work is the wife in? If she reenters the field at reduced pay in the future would it be at something like half her current income where she could still make $40K for part time worK? If so that is still real good pay and a lot different than her having few marketable skills if she is out of the job market for ten years.

I totally understand her wanting to be a stay at home mom but I have seen way too many situations where a woman ended up having to go back to work even though she didn't plan to. No one plans on a death, divorce, disability, husband having a drug or alcohol problem, the husband having mental problems that impacts his ability to work like severe depression, etc. Things like this can happen even in "good" families so don't assume that it can't happen to you.

Giving up her current income to stay at home is personal choice with no one right or wrong answer but I would urge her to be extremely cautious about giving up her future earning power.
Thanks for your detailed analysis of our situation, Watty. If husband retires as a fed we'll have the FERS annuity to fill up most/all the 0% bracket up to the standard deduction I think - but good point to continue to prefer traditional contributions and not take on any unnecessary tax costs.

For taxable investing over the next year, that would be *after* making our 2018/2019 Roth IRA contributions (since we could withdraw Roth IRA contributions tax free) - do I have that right? If not, what is the reason to prefer taxable contributions to Roth IRA contributions? (after maxing the workplace traditional accounts and HSA as you mentioned)

Both our cars are fairly new/low miles, so we should be good there for several years unless something unexpected happens. Slowly building a car fund for 5-10 years down the road sounds good though.

Wife is in the financial services industry - you've made me think we should investigate a more family-friendly working role for her, possibly very part-time contracting. (not sure this exists - we'll look into it) In our family tree we've seen retirement plans go south and older adults need to reenter the workforce reluctantly, so realize the risks to this plan are real. But we also don't want to trade away her potential years at home with the kids out of the fear of something that may (likely?) never materialize. If anything, we may be more cautious than others when it comes to her potential future job prospects, since we do not have the best examples of retirement preparedness in our extended family and do not want to be a burden to our children.

Thanks again for your perspective and help in thinking through all of this.

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by Watty » Sun Dec 24, 2017 11:34 am

ICMoney wrote:
Sun Dec 24, 2017 11:07 am
For taxable investing over the next year, that would be *after* making our 2018/2019 Roth IRA contributions (since we could withdraw Roth IRA contributions tax free) - do I have that right? If not, what is the reason to prefer taxable contributions to Roth IRA contributions? (after maxing the workplace traditional accounts and HSA as you mentioned)
You don't have a lot in the taxable accounts so if you have a large expense and have to withdraw money from a Roth that could mean that you don't get the retirement savings credit that year. You can look at the details on form 8880 to see how making Roth withdrawals could reduce that credit.

There is little downside to using the taxable now since in a few years when you have one income if you decide that you would rather have the money in the Roth you could make a Roth contribution of $5,5000 each from the taxable account since you would not be funding the Roth from your earnings.

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Sun Dec 24, 2017 12:00 pm

Watty wrote:
Sun Dec 24, 2017 11:34 am
ICMoney wrote:
Sun Dec 24, 2017 11:07 am
For taxable investing over the next year, that would be *after* making our 2018/2019 Roth IRA contributions (since we could withdraw Roth IRA contributions tax free) - do I have that right? If not, what is the reason to prefer taxable contributions to Roth IRA contributions? (after maxing the workplace traditional accounts and HSA as you mentioned)
You don't have a lot in the taxable accounts so if you have a large expense and have to withdraw money from a Roth that could mean that you don't get the retirement savings credit that year. You can look at the details on form 8880 to see how making Roth withdrawals could reduce that credit.

There is little downside to using the taxable now since in a few years when you have one income if you decide that you would rather have the money in the Roth you could make a Roth contribution of $5,5000 each from the taxable account since you would not be funding the Roth from your earnings.
Thanks Watty - makes sense now, that we should consider the saver's credit and that we will have plenty of tax-advantaged space to fill up if we can when we're on one income.

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by evilityb » Sun Dec 24, 2017 8:41 pm

If I did the math right, it looks like about $400k of the portfolio is Mom's. I'm assuming Mom is 36 and Dad is 38 (based on the order you listed above). If that's correct, then:
1) :sharebeer Mom is awesome.
2) Mom deserves a break.

Also, well done on finishing up grad school with no student loan debt while raising multiple kids.

If you plan on retiring from the Federal government at your minimum retirement age (60), you should be well set for retirement. Of course, this is not a risk-free plan, as you mentioned. But, as long as nothing major derails this, you should be okay (and there are ways to mitigate the impact of most of the likely derailments).

My biggest concern is your emergency fund. It's generally recommended to have at least 6-8 months minimum set aside in liquid accounts. You can also have cash available in other forms, such as a HELOC or 0% interest credit cards to help smooth consumption. The kids might also get more expensive as they get older, so that is something to consider in your future budget, as well.

Personally, I would contribute the minimum to your TSP/401(k) to get the matches and then load up your liquid accounts over the next several months. Instead of leaving the workforce on a set date, it would be better if she left the workforce when all of your ducks are in a row. If that takes 2 years instead of 1.5, then she should wait until then. If you can do it faster, then that's fine, too.

Since part of her reason for leaving the workforce is dissatisfaction at work, I would encourage her to find another job now. I suggest that because there is no reason to work in a job you don't like when you have options, even if it's just for a year and a half. She also might discover that she doesn't want to leave the workforce entirely when her work environment is better. She might even be able to find a job that allows her to work even fewer hours or with high flexibility that gives her the best of both worlds. I encourage you to consider this because the opportunity cost of leaving the workforce is *so high* for women. Once we're out for an extended period of time, we either don't get back in at the pay levels we deserve or we don't get back our professions in at all. Economist Johana Lahey found* that age discrimination against women begins at 35 and each passing year it takes women longer to get back into the workforce. Keeping a 10-hour a week schedule, freelancing, or finding temporary assignments can mitigate this risk until you're both completely sure she wants to leave indefinitely.

Good luck. I hope it all works out as best as possible. :happy

(*Sources: https://www.pbs.org/newshour/show/women ... not-wanted; http://jhr.uwpress.org/content/43/1/30.full.pdf)
Make sure the fortune that you seek is the fortune that you need - Ben Harper

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by warner25 » Sun Dec 24, 2017 10:25 pm

Just a vote of confidence here from me. Bogleheads forum consensus always seems to discourage the SAHM because from a financial standpoint, yeah, there are risks and it's never the most profitable option, but then we could all be working harder and making more money somehow. I'm sure that having a $164k/year income is nice, but so are many aspects of having/being a SAHM. You guys are well above average with your current portfolio, and saving at least $14k/year plus earning a FERS pension also puts you well ahead of most families. Our numbers are not much better than what yours will be, and we feel comfortable.

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by Lafder » Mon Dec 25, 2017 11:55 am

Some of this has already been said, but I will repeat it.

Immediately start saving all of your wife's income and not using any of it for expenses. That will give you a more realistic sense of what it will be like to live on your income only. At the same time it is building up your emergency fund :) Max her retirement account deductions, that money won't be used for years anyway and it is precious space that is lost if not used.

As a working mom myself, I got some advice that has rang true for me.

Always keep a foot in the door at work since it is easier to increase or decrease hours than re enter the work force. The way things are done and connections change quickly. Part time is not possible in all fields, so of course that is a factor.

The way part time is structured matters. The time to get ready and get kids taken to childcare and commuting is the same amount of time whether you are at work for 4 hours or ten hours. So work fewer longer days to minimize the "wasted time" getting ready and commuting. :)

lafder

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by gotester2000 » Mon Dec 25, 2017 12:45 pm

Save mom's entire salary for 1.5 yrs. Mom should take full break and enjoy time with kids - been there, done that - it is a great joy. She can return to work in a few years if she wants - does the pay and position really matter?
Dad has a steady job and I dont really see any issues - expenses will be reduced by 8k(giving part) at least. Portfolio growth + savings additions will build a decent corpus over time.

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Mon Dec 25, 2017 2:39 pm

evilityb wrote:
Sun Dec 24, 2017 8:41 pm
If I did the math right, it looks like about $400k of the portfolio is Mom's. I'm assuming Mom is 36 and Dad is 38 (based on the order you listed above). If that's correct, then:
1) :sharebeer Mom is awesome.
2) Mom deserves a break.

Also, well done on finishing up grad school with no student loan debt while raising multiple kids.

If you plan on retiring from the Federal government at your minimum retirement age (60), you should be well set for retirement. Of course, this is not a risk-free plan, as you mentioned. But, as long as nothing major derails this, you should be okay (and there are ways to mitigate the impact of most of the likely derailments).

My biggest concern is your emergency fund. It's generally recommended to have at least 6-8 months minimum set aside in liquid accounts. You can also have cash available in other forms, such as a HELOC or 0% interest credit cards to help smooth consumption. The kids might also get more expensive as they get older, so that is something to consider in your future budget, as well.

Personally, I would contribute the minimum to your TSP/401(k) to get the matches and then load up your liquid accounts over the next several months. Instead of leaving the workforce on a set date, it would be better if she left the workforce when all of your ducks are in a row. If that takes 2 years instead of 1.5, then she should wait until then. If you can do it faster, then that's fine, too.

Since part of her reason for leaving the workforce is dissatisfaction at work, I would encourage her to find another job now. I suggest that because there is no reason to work in a job you don't like when you have options, even if it's just for a year and a half. She also might discover that she doesn't want to leave the workforce entirely when her work environment is better. She might even be able to find a job that allows her to work even fewer hours or with high flexibility that gives her the best of both worlds. I encourage you to consider this because the opportunity cost of leaving the workforce is *so high* for women. Once we're out for an extended period of time, we either don't get back in at the pay levels we deserve or we don't get back our professions in at all. Economist Johana Lahey found* that age discrimination against women begins at 35 and each passing year it takes women longer to get back into the workforce. Keeping a 10-hour a week schedule, freelancing, or finding temporary assignments can mitigate this risk until you're both completely sure she wants to leave indefinitely.

Good luck. I hope it all works out as best as possible. :happy

(*Sources: https://www.pbs.org/newshour/show/women ... not-wanted; http://jhr.uwpress.org/content/43/1/30.full.pdf)
Thanks for your encouragement, evilityb. Interesting take on age discrimination against women - it may help a bit that she's in a field that's male dominated (i.e. there may be some focus - from HR at least - on trying to recruit women?). We will need to think about how to balance what seems best for our family in the near future (mom staying at home for a time) vs. her future employability.

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Mon Dec 25, 2017 2:41 pm

warner25 wrote:
Sun Dec 24, 2017 10:25 pm
Just a vote of confidence here from me. Bogleheads forum consensus always seems to discourage the SAHM because from a financial standpoint, yeah, there are risks and it's never the most profitable option, but then we could all be working harder and making more money somehow. I'm sure that having a $164k/year income is nice, but so are many aspects of having/being a SAHM. You guys are well above average with your current portfolio, and saving at least $14k/year plus earning a FERS pension also puts you well ahead of most families. Our numbers are not much better than what yours will be, and we feel comfortable.
Thanks, warner25. We realize choosing a stay at home parent isn't the best on paper financially, but appreciate you saying that we are probably already ahead enough on saving to give ourselves a decent shot of making it on only one income.

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Mon Dec 25, 2017 2:45 pm

Lafder wrote:
Mon Dec 25, 2017 11:55 am
Some of this has already been said, but I will repeat it.

Immediately start saving all of your wife's income and not using any of it for expenses. That will give you a more realistic sense of what it will be like to live on your income only. At the same time it is building up your emergency fund :) Max her retirement account deductions, that money won't be used for years anyway and it is precious space that is lost if not used.

As a working mom myself, I got some advice that has rang true for me.

Always keep a foot in the door at work since it is easier to increase or decrease hours than re enter the work force. The way things are done and connections change quickly. Part time is not possible in all fields, so of course that is a factor.

The way part time is structured matters. The time to get ready and get kids taken to childcare and commuting is the same amount of time whether you are at work for 4 hours or ten hours. So work fewer longer days to minimize the "wasted time" getting ready and commuting. :)

lafder
Thanks, lafder. I like your idea of still maxing mom's 401k but saving everything else in an emergency fund as a practice run being on only one income. We will work in the meantime on exploring if there are ways to keep a toe in the door of the workforce while she stays at home full-time.

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Mon Dec 25, 2017 2:53 pm

gotester2000 wrote:
Mon Dec 25, 2017 12:45 pm
Save mom's entire salary for 1.5 yrs. Mom should take full break and enjoy time with kids - been there, done that - it is a great joy. She can return to work in a few years if she wants - does the pay and position really matter?
Dad has a steady job and I dont really see any issues - expenses will be reduced by 8k(giving part) at least. Portfolio growth + savings additions will build a decent corpus over time.
Thanks, gotester2000. One of our biggest takeaways from the bogleheads is to explore whether mom should maintain some connection to the workforce (i.e. contracting, different flexible position) vs. a short/long complete break to stay at home. I think right now it would be good for her to have a complete break once the emergency fund is built up, but maybe a different job arrangement or something more flexible could help maintain connections/skills. We really feel her staying at home is a good move for our family, and appreciate you and the other posters who've looked at our numbers to evaluate how we can make this work.

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Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by runner540 » Mon Dec 25, 2017 4:17 pm

Lafder wrote:
Mon Dec 25, 2017 11:55 am
Some of this has already been said, but I will repeat it.

Immediately start saving all of your wife's income and not using any of it for expenses. That will give you a more realistic sense of what it will be like to live on your income only. At the same time it is building up your emergency fund :) Max her retirement account deductions, that money won't be used for years anyway and it is precious space that is lost if not used.

As a working mom myself, I got some advice that has rang true for me.

Always keep a foot in the door at work since it is easier to increase or decrease hours than re enter the work force. The way things are done and connections change quickly. Part time is not possible in all fields, so of course that is a factor.

The way part time is structured matters. The time to get ready and get kids taken to childcare and commuting is the same amount of time whether you are at work for 4 hours or ten hours. So work fewer longer days to minimize the "wasted time" getting ready and commuting. :)

lafder
Lafder, thanks for sharing this!

To the OP, I second all the advice to throw all of Mom's salary into emergency fund and retirement accounts.

Your wife's human capital is an asset currently worth millions of dollars ($160k/year, pick any annuity rate). It's well worth some effort to find ways of maintaining that asset as mich as possible. Good luck!

Fishing50
Posts: 267
Joined: Tue Sep 27, 2016 1:18 am

Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by Fishing50 » Mon Jan 01, 2018 7:54 am

ICMoney wrote:
Sun Dec 24, 2017 6:47 am
PFInterest wrote:
Sat Dec 23, 2017 6:08 pm
Beef up EF. I would not dare touch my Roth.
Thanks PFInterest - I wondered if someone would mention this, so appreciate the encouragement to bring this up vs. other priorities.
As mentioned by others, increased taxable investments should be the focus because it adds flexibility when income decreases and avoids tapping Roth accounts.

Investing priorities should be 401k & TSP to the match, Roth IRAs, then total equity market index funds in taxable.

Without significant misconduct your future government paychecks are not at risk, so a 2 month EF is enough with taxable investments. You can even have taxable dividends paid in cash in case you need the cash or choose to reinvest them. There's simply no need to for you to have excessive money sitting in cash.
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

hightower
Posts: 512
Joined: Mon Dec 12, 2016 2:28 am

Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by hightower » Mon Jan 01, 2018 8:05 am

ICMoney wrote:
Sat Dec 23, 2017 5:07 pm
We have young kids ranging from ages 0 to 7 and are planning for mom to start staying at home with them within the next 1.5 years. We are trying to decide what to do financially in the next 6-12 months to best position ourselves for this change - in particular what to do with the mortgage so that we can make our expenses work on one salary in the future while still saving at a meaningful level on one salary going forward. Mom may go back to work someday, but unless she reentered the same field within the next 5 years it wouldn't be at her current salary level - probably best to assume for this purpose that future earnings would be limited for her. Please see our financial information and expenses below:

Emergency funds: 2 months of expenses (we see Roth IRAs as extra e-funds in addition, current basis in Roth IRAs is $23K and will be $63K in 2019)
Debt: $140K @ 3.25% mortgage, 15yr fixed (about 6 months in), $1000/mo. House is worth about $350K.
Tax Filing Status: MFJ
Tax Rate: 22% Federal, 5% State
Age: 38/36
Income: $84K him, $80K her (part-time)

Current retirement assets

Size of the portfolio: $475K

His TSP
11% G fund (.04%)

Her 401k
9% International index (.08%)
17% US Large cap index (.01%)

Her Roth 401k
4% International index (.08%)
6% US Large cap index (.01%)

His Roth IRA at Vanguard
5% Vanguard Total Stock Market VTSAX (.04%)

Her Roth IRA at Vanguard
13% Vanguard Total Stock Market VTSAX (.04%)
15% Vanguard Total Bond Market VBTLX (.05%)

Her Traditional IRA at Vanguard
5% Vanguard Total Stock Market VTSAX (.04%)
3% Vanguard FTSE All World ex-US VFWAX (.11%)
3% Vanguard Total Bond Market VBTLX (.05%)

Her Cash Balance Pension
6%

Her HSA
3% Vanguard Total Stock Market VTSAX (.04%)


New *possible* annual Contributions
$18,500 his 401k (plus 5% employer matching contributions)
$18,500 her 401k (plus 7% employer matching contributions)
$5,500 his IRA/Roth IRA
$5,500 her IRA/Roth IRA
$6,900 her HSA
$20,000 her mega backdoor Roth


No college savings for the kids, we are planning to cash flow this or use Roths when it comes.


Expenses - annual approximately $60K
House insurance 1900
House taxes 6400
House maintenance 1000
Lawn care 1000
HOA dues 125
Mortgage 12,000
Car insurance and licensing 1800
Car maintenance 500
Life insurance ($500K/ea term 25 years remaining non-employer policies, this is in addition to 5x salary each at current employers) 1300
Gas 1800
Clothing 500
Grocery 8400
Personal care 360
Her Own-Occ Disability income insurance 1700 (cannot get own-occ disability insurance on Him which we realize is a potential issue, there is an any-occ disability benefit under His FERS though)
Childcare 2040
Date night 1800
Restaurant - other 900
Utilities 2400
Internet 480
Phone 360
Kids activities 2400
Gym 600
Giving 8000
Other 2400



Questions:
1. Our expenses won't allow for much retirement savings going forward - we'd only have about $14K to put towards TSP/HSA/IRAs per year. Should we throw as much of her salary over the next year at the mortgage as possible? Before she stops working, we could then request a recast to get monthly mortgage payment down to a more comfortable level that would still allow us to max HSA and TSP (the thinking is to prefer TSP to IRAs in order to get as much G-Fund as possible, is that a good move?). We wouldn't be able to contribute much if anything to IRAs on one salary most likely.

2. How much of her salary should we put in retirement savings over the next 1-1.5 years? Just the minimum to get the 401k match plus maxing HSA, maxing her traditional 401k+HSA (which is preferable from a tax perspective because would defer more of her salary), or all of these plus maxing mega backdoor roth? The idea would be to throw any excess at the mortgage in order to recast, or something else - what might "something else" be? Would it be a bad idea to forego mega backdoor Roth and/or other of her savings opportunities so we have more to put towards the mortgage, in order to make our monthly cash flow on one salary (with a recast) look better? I realize mega backdoor Roth is a great opportunity but maybe those dollars could be better used elsewhere?

3. Once mom stops working, we will do Roth conversions of her traditional retirement accounts over a period of 4-5 years to get us the max $2000/child tax credit each year (which will take us a bit into the 22% tax bracket, because if we just convert to the top of the 12% bracket then we get a lower refundable child tax credit). Then all retirement monies will be in Roths except for TSP, we'd plan to start doing Roth TSP at that point. Any issues with this plan?

4. Any red flags you see that we need to shore up over the next 1.5 years as we prepare for this change in our family?

Thanks for your time and thoughts on our situation.

Best,
ICM
My initial thoughts...

You have a ton of equity in your house already. Why are you in such a hurry to pay off that mortgage? I would refinance to a fixed 30 year term mortgage and free up some cash each month. With a 50% salary drop, you can't afford that 15 year mortgage any longer. And I see no reason to pay it off early given how tight cash will be.

Also, I would beef up your e-fund to around 6 months of expenses

Max out her retirement accounts if possible this year.

Other than that, there's not much you can do differently in my opinion. She should consider finding ways to make money from home. She's obviously a productive person making 80k/yr part time. I also agree that if she's capable of making that much part time, I would consider the possibility of you being a stay at home dad and her going to work full time instead. Sounds like her earning potential is higher. Unless she is really looking forward to quitting/doesn't like her job.
Curious what you guys do for a living?

After reading other responses, I agree that a good "trial run" financially speaking would be to save every dime she makes this year. Max all retirement accounts and put everything else she makes into a taxable and pretend she's not bringing home anything. That's a great way to see how it will feel to have just your salary and will probably offer the best insight as to what you guys need to do when she quits.

WolfgangPauli
Posts: 263
Joined: Sun Aug 23, 2015 8:28 am

Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by WolfgangPauli » Mon Jan 01, 2018 9:05 am

First, congratulations... I know it somehow can come out wrong but having a SAHM or SAHD was a must for my family. So, to that end we always built our expenses off of one income... even when we had no kids (at that age, you never know when one may "appear").

So, The I would only add two things: 1) heed the advice given relative to "test" first. Just make believe you only have one income while still having two. Should not be a problem but defiantly test drive it.

2) Your expenses have a lot of room to be reduced. $1800 on date nights? I never spent that when I was courting let alone when married. Go to a matinee movie - $10. Cut your own lawn, no need for childcare (Although I did know a lady who had full time childcare even though she was a SAHM - she was a fitness expert and worked out like all day long - Husband was a ENT doctor and probably made about $500K so it did not matter much). etc. etc. Your mortgage is not the problem.. all the other stuff is.

Just as a point of reference, I am making significantly more than you (I am older) and i spend significantly less than you... been married 35 years so it seemed to work OK not to have $1800 in "date nights" :)

Finally, when planning on investments do it in this order: Retirement first, second and third (No one will loan you money for your retirement), Emergency fund, college savings.. then all other.. just my two cents.
Twitter: @JAXbogleheads | EM: JAXbogleheads@gmail.com

ICMoney
Posts: 170
Joined: Fri Oct 28, 2016 2:38 pm

Re: Plan for Stay at home mom within 1.5yrs - what to do about mortgage/saving/expenses

Post by ICMoney » Mon Jan 08, 2018 3:33 pm

Thanks again to everyone who has responded - you've given us a lot to think about, and a way forward. We're really grateful for those who have taken the time to read and respond to our situation. Our plans at this point are for sure to increase the emergency fund, and to explore alternatives for mom's work life/skill set before making any permanent changes (ranging from a different job altogether, to a different role at her current employer, to increased flexibility/contracting, to how to maintain skills for a short-term complete break from the workforce, to simply going SAHM for the long-term with no intention of returning to her current profession).
runner540 wrote:
Mon Dec 25, 2017 4:17 pm
Your wife's human capital is an asset currently worth millions of dollars ($160k/year, pick any annuity rate). It's well worth some effort to find ways of maintaining that asset as mich as possible. Good luck!
I had never thought about it this way - thank you for sharing. While money isn't everything, we would like to try to do some good with any excess funds, if there are any, beyond providing for our family.
Fishing50 wrote:
Mon Jan 01, 2018 7:54 am
Without significant misconduct your future government paychecks are not at risk, so a 2 month EF is enough with taxable investments. You can even have taxable dividends paid in cash in case you need the cash or choose to reinvest them. There's simply no need to for you to have excessive money sitting in cash.
Thanks for this perspective - we will aim to find a balance between keeping a small amount of cash in our Ally savings account vs. taxable EF.
hightower wrote:
Mon Jan 01, 2018 8:05 am
My initial thoughts...

You have a ton of equity in your house already. Why are you in such a hurry to pay off that mortgage? I would refinance to a fixed 30 year term mortgage and free up some cash each month. With a 50% salary drop, you can't afford that 15 year mortgage any longer. And I see no reason to pay it off early given how tight cash will be.
Thanks for your response - I can be risk averse and the mortgage being the biggest line item on the budget made it seem like something we should try to reduce. But I have come around thanks to the bogleheads to just making the monthly payments since we can afford those for now - and look into refinancing to a 30yr if we need some payment relief (and/or want to contribute more to retirement accounts if/when we get to where we can't max them anymore).
WolfgangPauli wrote:
Mon Jan 01, 2018 9:05 am
First, congratulations... I know it somehow can come out wrong but having a SAHM or SAHD was a must for my family. So, to that end we always built our expenses off of one income... even when we had no kids (at that age, you never know when one may "appear").

So, The I would only add two things: 1) heed the advice given relative to "test" first. Just make believe you only have one income while still having two. Should not be a problem but defiantly test drive it.

2) Your expenses have a lot of room to be reduced. $1800 on date nights? I never spent that when I was courting let alone when married. Go to a matinee movie - $10. Cut your own lawn, no need for childcare (Although I did know a lady who had full time childcare even though she was a SAHM - she was a fitness expert and worked out like all day long - Husband was a ENT doctor and probably made about $500K so it did not matter much). etc. etc. Your mortgage is not the problem.. all the other stuff is.

Just as a point of reference, I am making significantly more than you (I am older) and i spend significantly less than you... been married 35 years so it seemed to work OK not to have $1800 in "date nights" :)

Finally, when planning on investments do it in this order: Retirement first, second and third (No one will loan you money for your retirement), Emergency fund, college savings.. then all other.. just my two cents.
Thanks for pointing out some room to trim our expenses - it's helpful to know where we can cut back from someone who's already been through it on one income. Re: date nights, I agree, it's kind of high. We feel date nights are important to the health of our marriage, and since we don't have anyone to watch our kids "for free" we pay babysitters $40 or more when we go out. With a bunch of young kids right now these are sometimes our only outings to be grown-ups so we try to enjoy them which tends to mean sit-down dinners at non-family restaurants. We can certainly re-envision this though to incorporate more date nights "at home" or at free community events.

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