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The cost of staying home

Tips for managing the transition from two incomes to one.

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It’s not uncommon for couples to struggle with the decision to both work or have one partner stay home to raise children. Although there are pros and cons with either option that go beyond money, giving up an income can be tough. But it’s not impossible as long as you plan in advance and manage the financial adjustment in a prudent manner.

As with most big decisions in life, it’s important to recognize that making such an adjustment will impact your financial life. For example, living on less income will likely have implications for your budget, health insurance, life insurance, retirement savings, and more. But, there may be some financial advantages, such as reduced commuting and clothing costs and lower child-care expenses. And of course, you need to weigh the other big factors in the decision that go beyond the budget: your quality of life, career, and relationship with your child.

If you are thinking about moving to a one-income household, here are a few strategies to consider before the transition.

Revise your budget. There’s no doubt about it, paying the bills on one salary can be tough. So you have to make some difficult choices. Go through your monthly expenses and categorize them based on needs (essential) and wants (discretionary). Once you’ve established your one-income budget, try living on it for a couple of months before giving up that second income.

“Think of it as a trial run and a chance to give you the real experience before making such a dramatic change in your finances,” says John Sweeney, executive vice president at Fidelity Investments. “You’ll get a chance to track your spending, see where you need to cut back, and even use the income you’re not spending to pay down debt or build your emergency fund, prior to the transition.”

Secure health benefits. Health insurance is a must these days, especially if you’ve got children. But it’s expensive and you need to compare the total costs you will be expected to pay. Consider that in 2013, the average annual premiums for employer-sponsored health insurance were $5,884 for single coverage and $16,351 for family coverage. The single premium is 5% higher and the family premium is 4% higher than the 2012 average premiums.2 So, if you have to switch health care plans when you transition to one income, compare the old health care plan and the new one very carefully to see if your out-of-pocket costs will be higher once you switch. If you find they will increase, be sure to work these additional costs into your budget.

Revisit your retirement savings. Though it may seem like the easiest thing to cut when you’re short on cash, cutting back on retirement savings is typically not a good idea.

“Don’t derail your retirement savings just because you’re down to one income,” Sweeney says. “Look at what you can realistically afford–even if it’s less than what you were saving on two incomes.” If you stop saving, you’ll lose the advantages of possible tax-deferred growth over many years. The chart below shows the growth potential even one annual IRA contribution can have.

Or, you may even want to consider a Spousal IRA. “A Spousal IRA can help make up any savings opportunities you may lose through an employer-sponsored retirement plan when you leave work,” Sweeney says. This type of IRA allows non-wage earning spouses to contribute up to $5,500 for 2013 and 2014 to their own Roth IRA or traditional IRA, provided the other spouse is working and the couple files a joint federal income tax return. Tax-deductible IRA contributions and Roth IRA contributions are subject to IRS income limits. This IRA contribution is in addition to any IRA contributions the wage-earning spouse makes. This means eligible married couples can contribute up to  $6,500 for the 2013 and 2014 tax years to their respective IRAs. Spousal IRAs are also eligible for catch-up contributions.3

Count on less from Social Security. You may reduce your Social Security benefits because you may not have paid into the system for the required number of periods necessary to qualify. If you’ve planned your retirement saving strategy based on a certain level of income from Social Security, you may need to adjust your numbers in light of these reduced benefits. Perhaps you could increase the working spouse’s contributions to qualified retirement savings plans such as a 401(k) or 403(b) plan to help make up the difference. 

Remember though, you can claim benefits based either on your own earnings or on your spouse’s. Spousal benefits are equal to 50% of what your spouse gets if you begin drawing them at your full retirement age. You get less if you start taking them earlier. You’re automatically entitled to receive the higher monthly amount–one based on your own earnings or the spousal benefit. Prior to your full retirement age, Social Security makes this determination for you.

Match your mortgage to your income. If you’re planning to buy a home in the near future, you should strongly consider applying for a mortgage based on one income. This strategy may help you avoid buying more of a house than you can afford. For those with a mortgage, look carefully at the possible benefits of refinancing. Is there a mortgage product available that would improve your cash flow? For example, you might have gotten a great rate on a 15- or 20-year mortgage, hoping to pay your house off sooner. But if a 30-year fixed loan would cut your monthly housing costs, particularly given current low interest rates, it may be worth refinancing to help you make ends meet.

Finding the silver lining

Though it’s clearly a big financial sacrifice, dropping to one income may have some potential benefits for your bottom line and your quality of life.

Lower your income taxes. Since you’ll soon be paying taxes on just one income, you may want to consider adjusting your W-4 withholding to increase your take-home pay. This may mean you trade a refund at tax time for more cash in every paycheck. But, given the tighter cash flow on one income, you may prefer having more income each month rather than one lump sum during tax return season.

Boost your deductibles. Increasing your deductibles on your auto and/or homeowner’s insurance policies could save you money by lowering your insurance premiums. But, if you’re going to raise your deductibles, you have to plan for the potential of paying these higher costs. Because you may need to make a claim on your insurance policy someday, you should consider having the amount of your deductible set aside and easily accessible. Otherwise, raising your deductible may only cause financial problems. You may also save some money by consolidating your auto and homeowner’s insurance policies with one provider. Many insurance companies now offer discounts when supporting more than one insurance need.

Of course, quality of life isn’t just about money–especially when it comes to raising a family. Still, if you do find that one income creates too much of a cash pinch, there’s always the option of working part-time or going back to work full-time once the kids are older. But if you do decide to trade an income for more time with the family, be sure to plan ahead and sacrifice sensibly so you can reap and enjoy the benefits.

Learn more

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1. Aon Hewitt Analysis Shows Record-Low Health Care Cost Increases in 2012, October 3,
2012. http://www.prnewswire.com/news-releases/aon-hewitt-analysis-shows-record-low-healthcare-cost-increases-in-2012-172453121.html
2. Kaiser Family Foundation, Employer Health Benefits 2013 Annual Survey.
3. For Traditional IRA contributions for both working and non-working couples, maximum contribution limits are reduced by any amount contributed to a Roth IRA for the same year. It is the same if the non-working spouse contributes to a Roth IRA; the maximum contribution limit would be reduced by any amount contributed to a Traditional IRA.
The tax and estate planning information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide legal or tax advice. Fidelity cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Changes in such laws and regulations may have a material impact on pre- and/or after-tax investment results. Fidelity makes no warranties with regard to such information or results obtained by its use. Fidelity disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Always consult an attorney or tax professional regarding your specific legal or tax situation.

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