Case Study - Can I go part-time? What about saving for college?

[Lentils4Lunch]

Topic Title: Reader Case Study – What next?

Life Situation: Married filing jointly (I’m 35 and he’s 40), 2 preschool-age kids, DC metro area

Specific Questions:

1)   I think we’re doing alright, except for one big uncertainty looming in the horizon – college expenses for the kids. I would like to save enough to send them to an in-state public university. We recently increased our 529 contributions, but are unsure about balancing this goal with goal number 2.

2)   I want to reduce my hours. My husband is currently a stay at home dad and I’d like to cut back to working three days a week in order to spend more time with the family, volunteer at schools, be more present. However, I’m having troubling reconciling this goal with the desire to contribute a lot to the 529 plans while the kids are young.

3)   Any input you have about our current situation would be helpful, areas of improvement would be greatly appreciated. I know our groceries are ridiculous. That is embarrassing. Feel free to give us some menu planning tips or anything, really.


All figures are annual, unless otherwise stated.
Gross Salary/Wages: $131,000 – This is my income. Husband is out of workforce while the kids are young, may or may not go back after kids get to elementary school age.

Pre-tax deductions: 403B - $18,000; HSA - $5,256; health insurance premiums - $4,500; pension contribution - $516

Adjusted Gross Income: $103,357

Taxes: $21,429 (about $8.3k federal,$4.4k state, $7k SS, $1.8K Medicare)

Current expenses: 

Category	Monthly	Yearly
Mortgage	$1,547	$18,566
Property Tax	$322	$3,864
Homeowner's Insurance	$47	$563
Hulu plus internet	$63	$756
Car Insurance	$68	$812
Car Maintenance and gasoline	$55	$660
Charity	$25	$300
Kids activities	$30	$360
Clothing/shoes	$70	$840
Dentist/doctor visits	$100	$1200
Dining out/Bars/Entertainment	$130	$1560
Electric	$80	$960
Gas for heating	$80	$960
Groceries	$800	$9600
Household/yard maintenance	$100	$1200
Life Insurance	$40	$480
Miscellaneous	$75	$900
Cell phone	$40	$480
Preschool Tuition	$400	$4800
Travel	$83	$1000
Water	$50	$600
Total non-mortgage expenses	$2658	$31,895
Total expenses (including mortgage)	$4,205	$50,462
529 plan contributions	$800	$9,600
Grand Total including 529 contributions	$5,005	$60,062

okay, after typing these out, I am having serious second thoughts about laying this all bare... I mean $800 a month on groceries. What the hell is our problem??? This is embarrassing
         
Expected ER expenses: At some point we have to pay for our kids’ college, but otherwise, spending should be about the same (or hopefully lower), until we pay off the house in 2025.

Assets:
House: $400,00
Retirement: $640,806 (403B: $321,320; Vanguard tax-deferred IRA: $167,202; Roth IRAs: $152,286) 
Non-Retirement: $61,207 split 25/75 Vanguard total bond/total stock
Health Savings Account: $8,733
529 plans for the kids: $18,175

Liabilities:

Mortgage: Original principal $230,000; 15 years; current principal $143,651; Rate 2.625; P&I $1,547 per month

Specific Questions:

1)   I think we’re doing alright, except for one big uncertainty looming in the horizon – college expenses for the kids. I would like to save enough to send them to an in-state public university. We recently increased our 529 contributions, but are unsure about balancing this goal with goal number 2.

2)   I want to reduce my hours. My husband is currently a stay at home dad and I’d like to cut back to working three days a week in order to spend more time with the family, volunteer at schools, be more present. However, I’m having troubling reconciling this goal with the desire to contribute a lot to the 529 plans while the kids are young.

3)   Any input you have about our current situation would be helpful, areas of improvement would be greatly appreciated. I know our groceries are ridiculous. That is embarrassing. Feel free to give us some menu planning tips or anything, really.

[cchrissyy]

This CA single mom of 3 says, cut back on your work hours right now!

529 plans aren't the be all end all of college savings accounts. They're just not that advantaged. I have one for my kids and honestly wish I'd just used a brokerage account.
But that aside, in terms of saving for college in whatever way, here are other ways to pay for it besides working longer hours right now to put the $ aside early

you increase your work hours or salary in later years
your husband re-enters the workforce later
your kid(s) get scholarships and need less help
your kid(s) don't go to college after all
the grandparents or extended family help pay, or, you get an inheritance
your kids take out student loans but you pay them off
(sorry!)  you die too soon and there is life insurance

[Lentils4Lunch]

If your DH is a SAHD and you are only working part-time, do you really need the $400/month pre-school? 

This is a good point. Hadn't really questioned that expense because it's actually a relatively cheap preschool for our area. This will be going down quite a bit in six months as the older kid gets ready to start public kindergarten. 

[boarder42]

What if your kids choose not to go to college ? 529 withdrawals not used for education cost an extra 10% penalty.  What if the entire college landscape changes in 15 years.

[meandmyfamily]

I would also cut the preschool and work on lowering the groceries and then cut back your hours.  Find some mom groups and do regular playdates for free!  Looks like a great plan!

[Mariposa]

700k in retirement + taxable accounts is serious FU money. I think you're more than OK going part-time:

1) If you make enough to cover living expenses, 700k compounded at 4% after inflation will be ~1.25 million in 15 years. That's with zero cuts in your budget and not contributing another cent. I assume you're planning to contribute about 60% of what you're currently contributing to the 403b/HSA? Plus, the pre-school tuition will soon go away. And your house will be paid off before then.

2) Less of your income will be subject to the higher tax bracket(s) once your reduce your hours, and you will see more than a proportional 40% decrease in your taxes. Your entire salary is going to be subject to FICA taxes, though.

3) As others have pointed out, you might go back to full-time when your kids are older, or your husband might return to work.

4) Hmm. You could consider spending down your taxable account and continuing to max out 403b/HSA and even making 529 contributions for the tax advantage, if you're pretty sure your kids are going to need the funds. Someone more familiar with taxes could comment, but it looks like maxing out 403B/HSA in addition to the health premiums you pay might lower your AGI enough to actually put you within spitting distance of getting the Earned Income Tax Credit if you are earning 60% of 131k gross.

It's basically putting off early retirement to spend more time with your family now, a trade worth making in my opinion. I'm thinking about cutting back my hours with a young kid at home, and we have far fewer assets than you.

[cincystache]

you guys are crushing it! you would probably already be FI if you didn't live in such a high cost of living area.

I see absolutely NO problem going to part time immediately.

Remember, you don't have to pay for your kids' college. In fact, I'm thankful that my parents made me contribute to my own education because it taught me how valuable it was and to not take advantage of the opportunity.

Bottom line: you guys are in great shape, don't sweat the college costs.

[Lentils4Lunch]

What if your kids choose not to go to college ? 529 withdrawals not used for education cost an extra 10% penalty.  What if the entire college landscape changes in 15 years.

I suppose all of these are possibilities... I guess we're thinking 529s because of the tax benefits for state income taxes. What kind of changes in the college landscape are you talking about?

[Cranky]

I think that health insurance is a far bigger question than college funds at this point.

Really, if you are looking at 4 year in state tuition, it's just not that hard to cover it. We had very little in the way of college savings - dh was in grad school until he was 30yo, and I stayed home with the kids for 16 years.

When our oldest was ready for college, I got a part time job, and not a very great paying part time job, either, honestly. But, it did pay our EFC for all three kids, and then I started slinging in into my own little retirement fund, since we'd never counted on that money for living expenses. It's added up pretty fast, too.

But if you won't be eligible for employer based insurance if you go to part time, that's a big "if" IMO, at this particular point in time...

[boarder42]

What if your kids choose not to go to college ? 529 withdrawals not used for education cost an extra 10% penalty.  What if the entire college landscape changes in 15 years.

I suppose all of these are possibilities... I guess we're thinking 529s because of the tax benefits for state income taxes. What kind of changes in the college landscape are you talking about?

College was initially started as a place to meet and expand knowledge.  We now have the internet and the Kahn academy.  I think college prices will reach a tipping point and classes via the internet will be the norm. Why not have people learn from the best not just who is in their state. Possibly have remote campus for labs and hands on but I see the act of going away to a place to learn changing a lot in the next 20 years.  There are so many better ways to learn now and expand your own knowledge.

[Lentils4Lunch]

Cranky, good point on health insurance. I believe we would still have my employer-sponsored health insurance, but premiums would go up because amount my employer is contributing would go down proportionate to the reduction in my hours.

Thanks for the perspective on college. DH also thinks there are a lot of uncertainties about college landscape. I think I'm just really rattled by the number of my friends who, at the age of 35, some even older, are paying down significant student loans. I don't want to ever put my kids in that position so I feel like we're hedging our bets by trying to put lots into the 529s early. I have a few friends that are paying enough in student loan payments to rent a small apartment in the city. It's insane.

Another thing to think about, I guess DCA was alluding to this, is whether the tax benefits are really that great... especially if I bring down my income... we need to figure that out...

After that nice break from work over the holidays, I am having serious, serious feeling of general, non specific dread about heading back to the cubicle tomorrow... ugh... and I don't even dislike my job that much. The actual work is enjoyable. It's just the bullshit, the meetings, the interpersonal politics that get me into a funk.

[cchrissyy]

If it is important to you to pay for their college, that still doesn't mean you have to do it by saving now. You could do it from your income later. 

It looks like your house will be paid off in 2025 but your kids are only preschool age, so college starts when, 2030?  So without doing anything differently, you can easily redirect $1500/m for 5 years to college savings, and pay that much directly to college once it begins.

Also, your earnings will go up over the years but if you are frugal you can keep expenses low. You can direct the extra earnings to savings.

Also, perhaps your husband can earn money somewhere between these preschool years and when college begins. Can he work part time any of the years between elementary and college? Let his entire salary go to savings.

Lastly, if your 30-something kids have large loans (which is just an IF, since you don't know what schools they'll go to, how many degrees, if they have scholarships, etc) and you don't want the kids to pay them, you can always pay the loans yourself.  By then you will have higher income and low living expenses and no kids at home, so if you want to take on those payments later, go for it! That choice will always be available. Better to get to stay home part time right now. You'll avoid burnout and enjoy your family and your job more!

I think working less hours, and being home in these early years, are very worthwhile happy goals.
How about taking a year or two of this 3-day schedule and then re-evaluate? I think you'll be fine!

[Mariposa]

Another thing to think about, I guess DCA was alluding to this, is whether the tax benefits are really that great... especially if I bring down my income... we need to figure that out...

I'm no tax expert. But it looks like if you get your AGI down to $50k with 403B / HSA contributions, your federal tax liability would be only ~$250, assuming you get the full $2k child tax credit, and you're taking the standard deduction. If you max out your HSA and pay a couple thousand extra in pre-tax dollars for your health premiums, and your AGI goes below $50k, you will start to phase into the earned income tax credit:

http://www.cbpp.org/research/federal-tax/policy-basics-the-earned-income-tax-credit

This is a refundable credit, which means the IRS will actually write you a check. Note that your investment income can't exceed $3400 to qualify for the EITC.

Not sure about your state taxes, but at that level, the bulk of your taxes will be toward FICA.

Now, depending on your situation, you may have to pay taxes when you withdraw those funds ...

Any reason you're not maxing out the HSA?
http://forum.mrmoneymustache.com/investor-alley/401k-roth-then-what-50705/msg965668/#msg965668
http://www.madfientist.com/ultimate-retirement-account/

If you can't figure it out easily yourselves, you can search or post a question in the tax forums. There are some CPAs around here with really, really good advice.

[Mariposa]

Of course people on the MMM forums have figured out how to optimize taxes while working part-time with kids:

http://forum.mrmoneymustache.com/taxes/optimizing-taxes-maximizing-benefits-for-parttime-working/

[Lentils4Lunch]

DCA, thanks!

I just read through your link to working part-time with kids. It makes me feel like a real beginner! How do people figure all this stuff out? I mean, I can log into Turbo Tax and play around with the numbers, but there must be an easier way...

[Morning Glory]

 12 hour shifts are a good option, especially for those of us with children who are still growing our staches. For example, going from five eights to three twelves is only four hours less work per week, but it is a 40% reduction in commuting and daycare costs.  The best part: not ever having to go to Target or Costco on the weekend.