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Old 09-12-2012, 12:48 PM   #1
amylevan
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Reducing 401k Contribution

I am 24 weeks pregnant with our second child and in a few weeks will become a SAHM. (Daycare is just too expensive for 2, and well, I want to.) Anyhow, I have been pouring over our budget for weeks, cutting costs where we can, reducing services etc (bye bye vacation fund...). And I just don’t see where I can cut anymore without impacting our standard of living – which will always be an option if needed, but I’m trying to do the least amount of impact possible. So I am looking for ways to increase our income to make up the difference.

DH and I are young (both 33) and have both contributed approx 12% to our 401ks since we graduated college. (And we are both professional engineers…so while we aren’t rich by any means, we have made a decent salary since graduation). That, along with an ESOP plan and a small inheritance we received from DH’s mom when she passed away which serves as an emergency/retirement account, means we are well ahead of the average retirement savings for people our age. I am tempted to reduce DH’s contribution to 6% (the smallest he can contribute to earn the full company match) but am trying to figure out the consequences. I expect to eventually return to work but in the meantime will not be contributing anything to retirement either – meaning our retirement savings will automatically be cut in half, and will go down approx 75% if he cuts his in half.

My assumption that a few years (say 5) of a reduced savings amount this early in our careers will affect the amount, but not so much that it is a death sentence. I am just so ingrained to save that I am nervous about making the change…

Thoughts? Or other suggestions on how to increase the income?
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Old 09-12-2012, 01:09 PM   #2
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You know your numbers (and I'm assuming the math won't be hard if you are an engineer ), plug in the scenario and make your own judgement. Will what is left leave you with enough to retire?

A few thoughts....

You also have to save for college, in five years when you return to work, its going to be difficult to up the savings to your current "one kid" level. And daycare doesn't magically disappear when they start school - before and after care, and summer care, adds up fast. Plus you are going to want those luxuries back, like vacations. Is this a realistic plan, or is a more realistic plan that when you return to work some of what you would put to a 401k will get eaten up there. I'd run a scenario where your current two income 12% is as good as it gets - and when you return its more like you both contribute to company match.

Is your work in a field of constant change - where five years will mean starting over - or is it more static and you'll be able to step in again in five easily. (My uninformed perception of engineers is that some of them are doing the same types of things they did 20 years ago, and others are working in a world of constant change and five years from now it will be a different job).

My other thought is when it comes to retirement savings don't compare yourselves to being well ahead of other people - most of them are lousy at it. Are you well ahead of where YOU want to be.

The fact that your thinking this bodes well....and I'd expect the numbers to work out to "we can make this work" - but run your numbers.
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Old 09-12-2012, 01:37 PM   #3
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My gut reaction is this is the time to contribute to retirement. Keep in mind, $10 today should mean a lot more in 30 years, but $10 in 30 years won't be much. Good luck!
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Old 09-12-2012, 01:38 PM   #4
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Remember that the gain you'll get from cutting 401k contributions might not be as big as you think. It's pre-tax money now, but it will be post-tax when it goes into your paycheck, thus you won't be getting that full % to spend.

Also, you may end up owing more/getting less of a refund come tax time because that money will no longer factor into your deductions. Depending on your tax bracket/situation, you might be better off keeping up the contributions and finding some other way to come up with the money.

What sorts of cuts are you considering that will "impact your standard of living?" If it's stuff like cable TV, eating out, etc., decide which you want more: staying at home or "luxury" items.
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Old 09-12-2012, 01:41 PM   #5
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I agree with really thinking about how easy it will be to step back into your career after five years out. Not that you shouldn't be a SAHM. I am a SAHM. Just something to consider.

Also, in our situation since we were losing my retirement contribution we didn't want to reduce my DH's contribution also. But that is us and you may be fine with that reduction.
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Old 09-12-2012, 01:52 PM   #6
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NO NO NO - just pretend that money and deduction aren't even there - that's what I did as a SAHM and think of other ways to save money. With the tax help from a 401K, it's so much smarter to cut smaller items - dinners out, manicures, new shoes, gym memberships etc. It will only get harder to save money as kids grow up and become much more expensive and cutting your retirement is a slippery slope that you want to stay away from!
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Old 09-12-2012, 02:01 PM   #7
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as long as you take advantage of the company match, I think you are young enough to make up the reduction when times get better
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Old 09-12-2012, 03:29 PM   #8
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Quote:
Originally Posted by amylevan View Post
I am 24 weeks pregnant with our second child and in a few weeks will become a SAHM. (Daycare is just too expensive for 2, and well, I want to.) Anyhow, I have been pouring over our budget for weeks, cutting costs where we can, reducing services etc (bye bye vacation fund...). And I just don’t see where I can cut anymore without impacting our standard of living – which will always be an option if needed, but I’m trying to do the least amount of impact possible. So I am looking for ways to increase our income to make up the difference.

DH and I are young (both 33) and have both contributed approx 12% to our 401ks since we graduated college. (And we are both professional engineers…so while we aren’t rich by any means, we have made a decent salary since graduation). That, along with an ESOP plan and a small inheritance we received from DH’s mom when she passed away which serves as an emergency/retirement account, means we are well ahead of the average retirement savings for people our age. I am tempted to reduce DH’s contribution to 6% (the smallest he can contribute to earn the full company match) but am trying to figure out the consequences. I expect to eventually return to work but in the meantime will not be contributing anything to retirement either – meaning our retirement savings will automatically be cut in half, and will go down approx 75% if he cuts his in half.

My assumption that a few years (say 5) of a reduced savings amount this early in our careers will affect the amount, but not so much that it is a death sentence. I am just so ingrained to save that I am nervous about making the change…

Thoughts? Or other suggestions on how to increase the income?
Really, 33 isnt THAT young when you consider retirement savings. Not to mention, I assume you will want to save for your child's education. If you are already going to be home, that is going to cut contributions in half. Cutting DH's too is going to really have significant impact on the future unless you both plan to work well beyond average retirement age. You would be much better off cutting other expenses that shorting retirement.
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Old 09-12-2012, 04:00 PM   #9
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Quote:
as long as you take advantage of the company match, I think you are young enough to make up the reduction when times get better
I totally disagree - things don't get CHEAPER as kids get older. There are braces, lessons, camps, college, cars etc. And once you dip into your retirement income once, it's easy to continue to do so.
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Old 09-12-2012, 04:20 PM   #10
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How much total retirement savings do you have as a ratio to your income (i.e. if you have $200K in savings and your DH makes $100K/year then you have two times)? As a rule of thumb you should have .5x by 30, 1x by 35, and 2x by 40.

One thing to consider is that by living on half your income your needs in retirement are less compared to living on the full two household income. I know health costs are the big question mark, but, generally, if you can live on less you need less savings. I'm a SAHM and we kept DH's 401K savings at 15%. When we moved to a costlier house we cut his retirement savings and plan to up it next year. We currently have a little less than 2X DH's salary in retirement (at 34/33).

If you are looking for more money in your budget have you considered your tax situation? It's possible you can increase your DH's withholdings to get back more in every paycheck. Conversely, if you end up with a big tax refund you can put that money in a spousal ROTH under your name.
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Old 09-12-2012, 04:20 PM   #11
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From my standpoint
. . . currently retired, and living very comfortably
. . . was CEO and administered several retirement plans (incl 401k's)
. . . gave talks to employees on retirement planning
. . . wrote many articles for in-house newsletter on retirement


1) Of course, keep the minimum 6%
. . . that means free money
. . . free money is usually good money
2) Keep the 12% for as long as you can
. . . the compounding effect from this age is HUGE, HUGE, HUGE
. . . doing 12% now is better than 25% in 10 years
. . . and certainly better than 40% when you are 50-55
3) When things get tight, you can cut the 12% down to 6%
4) But, keep the 12% until it becomes a burden

PS - I also started out life as an engineer.
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Old 09-12-2012, 06:21 PM   #12
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If you cut from 12 to 6 percent, you will be surprised how much you taxes will increase and how little of that money you will actually clear.
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Old 09-12-2012, 07:01 PM   #13
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Quote:
Originally Posted by goodeats View Post
How much total retirement savings do you have as a ratio to your income (i.e. if you have $200K in savings and your DH makes $100K/year then you have two times)? As a rule of thumb you should have .5x by 30, 1x by 35, and 2x by 40.

One thing to consider is that by living on half your income your needs in retirement are less compared to living on the full two household income. I know health costs are the big question mark, but, generally, if you can live on less you need less savings. I'm a SAHM and we kept DH's 401K savings at 15%. When we moved to a costlier house we cut his retirement savings and plan to up it next year. We currently have a little less than 2X DH's salary in retirement (at 34/33).

If you are looking for more money in your budget have you considered your tax situation? It's possible you can increase your DH's withholdings to get back more in every paycheck. Conversely, if you end up with a big tax refund you can put that money in a spousal ROTH under your name.
If only looking at my DH's salary, we have about 3.5x his income in retirement accounts (not all 401k, some is in a taxable account that doubles as an extreme emergency account).

I do plan to increase our withholdings. We are adding a dependent, and will be making less as a household. So there will be a little more coming in that way.

I appreciate the reminder to consider re-entering the work force, but I am a structural engineer, and aside from software programs improving and building codes changing slightly, the industry isn't a rapidly changing market like some of the other types of engineers (a bridge is a bridge is a bridge...). I realize anything can happen to the economical side, but my boss has already told me that he will rehire me at any time. (And has actually offered to give me freelance jobs when they are available and if I desire...so this may all be moot point now....)

Thanks for all the thoughts....I really am taking it all in, analytical that I am.
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Old 09-12-2012, 10:47 PM   #14
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Quote:
Originally Posted by amylevan View Post
If only looking at my DH's salary, we have about 3.5x his income in retirement accounts (not all 401k, some is in a taxable account that doubles as an extreme emergency account).

I do plan to increase our withholdings. We are adding a dependent, and will be making less as a household. So there will be a little more coming in that way.

I appreciate the reminder to consider re-entering the work force, but I am a structural engineer, and aside from software programs improving and building codes changing slightly, the industry isn't a rapidly changing market like some of the other types of engineers (a bridge is a bridge is a bridge...). I realize anything can happen to the economical side, but my boss has already told me that he will rehire me at any time. (And has actually offered to give me freelance jobs when they are available and if I desire...so this may all be moot point now....)

Thanks for all the thoughts....I really am taking it all in, analytical that I am.
Why not work part time 2 or 3 days a week. You may find being home 100 of the time with less money to be NO fun at all. I do the same type of work as you. I have since sold my company I worked 95% in Europe and Asia. I have a non-compete for 3 years from the sale of my company. I will be getting a part time job when that is up. Heck, I almost applied for a $10 an hour part time clerks job at my town last week. Seriously it is nice being home, I love my daughter; but it can also be BORING. I NEEDED time away from her and frankly so did she (too clingy) so I put her in a parents day out class at a local church.

I am NOT limited on funds, and still find some of her classes expensive. We do a class 4 of 7 days per week (2 half hour swimming, 1 half hour music and the 4 hour drop off class). I don't want her over scheduled, but I am bored out of my mind some days.
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