Spending plan for increased child care costs

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peseta
Posts: 116
Joined: Mon Mar 09, 2015 11:40 pm

Spending plan for increased child care costs

Post by peseta » Wed Dec 19, 2018 10:05 pm

My wife and I are expecting baby #2 in a few months. Barring something very unexpected, this will be our last child. We've managed to cash-flow child care for our first-born (who had a part-time nanny for two years, and will be soon starting preschool), while maxing out two 401ks (1 Roth, 1 traditional) and backdoor Roths. We've also managed to squirrel away a savings nut (on top of our fully-funded emergency fund) of over $100k for when the baby #2 is born.

We've been saving this cash because, assuming all goes well and smoothly with the new little one, we want to hire a live-in nanny to help with the new baby for a variety of reasons. Once we pay this nanny, we will probably be running an average monthly deficit of about $1500-2000 for as long as the nanny is here, which we think will be 2 years (assuming no changes with maxing-out of 401ks and Roths). Once the nanny goes, we should be able to cash-flow preschool for both kids while still maxing retirement; thus, we'd probably dump the balance of the nanny fund into the kids' 529s at that time.

We are in the 24% tax bracket. We've been saving for a few years in my Roth 401k for the tax diversification (more appealing since the tax cuts). My wife only has traditional. I'm a federal employee that may be a lifer, so I may have significant pension income in retirement, making Rothifying more appealing. Also, I will be 60 years old when our oldest is college-age, so retirement savings are available for paying for college (i.e., whether money is located in retirement or a 529 is not of much importance). Both of our jobs are secure in case of recession, and our retirement saving is on-track.

The question is: should we make changes to our retirement allocations to reduce the monthly deficit we'll be running? The choices I see are:

(1) Keep things as they are. This will draw down the nanny fund a bit more, leaving less residual for the (post-tax) 529s, but that money will be going into the Roth.

(2) Switch my 401k to traditional. This will free up an extra $400 or so per month, reducing the deficit a bit because of reduced necessary tax withholding.

(3) Switch my 401k to traditional and reduce both 401ks to minimum needed to get full match, which will free up even more money. Of course, that's less retirement saving.

There's a part of me that is drawn to (3), probably because I hate the thought of outflow>inflow, but I think that's illogical. We saved up all this money for a reason, and there's no problem with using it for a planned, temporary need, right? (1) and (2) make more sense to me, the main difference being whether we should be saving in Roth or traditional 401k vehicles. I have a preference for keeping things as they are, at least at first, because our Roth:Traditional 401k ratio is still quite low.

What would you do? Am I missing anything? Please keep thoughts confined to financial aspects (as opposed to the child care decision, unless you think we can't afford it for some reason).

Appreciate all the help as always, this community is the best!

peseta

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leeks
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Re: Spending plan for increased child care costs

Post by leeks » Wed Dec 19, 2018 11:47 pm

I'd do at least option 2 based on the information you laid out. I wouldn't worry about how much is going to 529s yet. You can focus on that more once they are both in school.

I assume you have considered the au pair route for the nanny - which could be significantly cheaper - and it is not right for you for whatever reason.

Your post almost implies you saved the $100K in two years since your first child was born. If you could save 50K per year while paying for a part-time nanny, I assume you could cash flow a live-in nanny. So you must have been saving for longer. Did you have any other goals for that "nanny fund" savings? Would spending it down affect your ability to purchase a home or upgrade housing if needed for the larger family? If you have other potential uses for that money that are important to you and your spouse, then maybe something in between options 2 and 3. You could keep your 401K as the Roth option and just not fully fund it.

Topic Author
peseta
Posts: 116
Joined: Mon Mar 09, 2015 11:40 pm

Re: Spending plan for increased child care costs

Post by peseta » Thu Dec 20, 2018 8:41 am

Thanks, Leeks. We already own a suitable house, so our priorities after tax-advantaged retirement savings would be in order: (1) 529s; (2) taxable; and (3) pay down mortgage ((2) and (3) could be flipped when we get to that point someday!). We saved the money over about 3.5 years, thus we couldn't cash flow the whole thing. Wife does not want au pair and we already have likely nanny candidate in mind.

Appreciate it!

peseta

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