Weighing Costs of Going Part Time
Balancing two demanding jobs with the needs of two young sons makes for hectic mornings and nail-biting evenings for Jonathon and Josefina Murray.
Each weekday morning is a mad dash to their sons’ child-care centers before rushing to work. The routine is repeated in reverse in the evening. “One of us is almost always late for work,” says Jonathon, 30. Even then, the boys, Matthew, 1, and Tyler, 4, are among the first to arrive and the last to depart the centers.
The Redondo Beach family is in relatively good financial shape. The Murrays are avid savers and earn about $60,000 each annually--but the long days away from the children wear on Josefina, 31. “It’s a pretty packed day when you have to go to work, cook dinner and take care of the kids,” she said. Her No. 1 goal? “Spend more time with our children.”
She particularly wants to be more available to her children when they are making the transition to regular school. “The ratio of children to teachers at the child-care center is very low, so I think it might be an adjustment for them when they get to school, so I want to be there for that,” she says.
To accomplish that, the Murrays have tentative plans to allow Josefina to reduce her work schedule in two years, when their youngest son starts school, then return to full-time work five years later.
But the couple wonder if the plan is realistic. Josefina earns half the family income, so they fear the move would wreck their goals of saving for a comfortable retirement and paying a significant chunk of their children’s college costs.
These goals are realistic, according to Manhattan Beach financial planner Preston Caves, who reviewed their situation for The Times.
Even before making any calculations, Caves is impressed with the amount the couple have saved at a young age. “You’ve done an awful lot of things right already,” Caves said.
Jonathon, a project manager for a health-maintenance company and Josefina, a shipping firm accountant, pour about $25,000 into savings each year, most of which is earmarked for retirement and their children’s college education.
They’ve already accumulated more than $92,000, including $57,000 in their companies’ 401(k) accounts and $14,000 in Roth IRAs. About $11,500 is set aside in custodial accounts for their sons’ college education and the remaining $10,000 is in a savings account.
They’ve paid off a $20,000 student loan that Jonathon took out to earn an MBA in 1996 and now pay $300 a month extra on their home mortgage in order to retire the 30-year loan a decade early.
The Murrays say they use their financial backgrounds to stringently budget, and they keep detailed records of their spending. They skimp on even small luxuries, such as dining out, and rather than saving whatever money is left over after expenses, they automatically have $1,000 a month transferred from their bank to their brokerage account. The money is then distributed to accounts set up for their children, their Roth IRAs and personal savings. They also contribute 10% of their wages for their 401(k) plans.
With significant savings already under their belt, Caves says, they can plan for Josefina to work part time. In any case, “you can’t always look at everything as a dollar-and-cents issue,” Caves said.
“As a financial planner, the inclination is to get people to save, save, save. But the real point is to achieve your goals, and spending time with children and reducing stress are very important priorities,” he said.
Of course, making this kind of determination is not an exact science. Josefina is unsure how much she can earn working part time, and how much might be saved in child care and commuting costs. And it’s difficult to know how factors such as investment returns, tax rates and inflation will affect savings. But most costs can be estimated. For example, in two years, the Murrays’ oldest son will be at school much of the day, reducing monthly $1,350 day-care expense by more than $500 per month.
Caves suggested a strategy aimed at building up their short-term savings account by delaying some longer-range savings.
First, Caves urged the couple to stop the $100 monthly contribution they make to each of their children’s college funds. In fact, Caves questions the wisdom of establishing such custodial accounts in the first place.
Although the income in those accounts is taxed at the children’s lower rate, the children will eventually control the money and have no obligation to spend it on college. What’s more, putting accounts in children’s names may reduce their eligibility for financial aid. Colleges expect students to contribute a greater proportion of funds they control for college than money controlled by parents.
Next, Caves said to skip making contributions to their Roth IRAs for the next few years. He also suggests that they quit paying the extra $300 toward their $186,000 mortgage and reduce their 401(k) payments to the level where they receive the maximum company match.
“Conventional wisdom says that you should take advantage of all tax-deferral opportunities, but this is one situation where it doesn’t apply,” Caves said.
These steps will increase savings by roughly $12,500 per year. Within two years, their $10,000 savings account will grow to more than $35,000 and could supply more than $7,000 per year for the family to dip into during Josefina’s period of reduced work.
“You need to focus the next two years on building your personal savings rather than on retirement or your kids’ college costs. There will be time for that later,” Caves said.
Caves thought Josefina should aim to generate half to two-thirds of her current income, although there is flexibility. The Murrays were buoyed by that projection but nervous about how it might affect their longer-term goals, such as retirement and their kids’ education.
The Murrays, both UCLA graduates, intend to pay at least half of what they figure a good public university costs, or about $7,500 per year for each of their boys in today’s dollars. The remainder, they expect, will be paid for through loans, grants and scholarships, or through jobs their sons hold during college.
The $11,500 the Murrays have already set aside for their sons’ college costs will cover about 20% of that goal, Caves calculates. If they delay saving the remainder until Josefina returns to full-time work, they will need to set aside $645 monthly for the boys. That amount is likely to be available once both parents are working full time, Caves projects.
To grow the college fund more quickly, Caves suggests moving the $11,500 from money market accounts to more aggressive mutual fund investments. With 14 years to go before the couple’s oldest son is college age, a mixture of 75% stocks and 25% bonds is appropriate, Caves said.
The couple hadn’t invested the money “because we’ve been lazy, not because we’re leery about the stock market,” said Jonathon. He said they had not researched exactly where to invest those funds.
The final piece of the Murrays’ puzzle is retirement. Though they anticipate one or both of them working well beyond their 60th birthdays, the couple use a 30-year time frame, when they will be 60 and 61, in keeping with their conservative natures.
Caves figures that the $71,000 the couple currently have in retirement accounts will grow to $946,000, assuming an annual growth rate of 9% during that 30-year period.
He also calculated that the couple will generate an additional $2.61 million from future 401(k) contributions, assuming that Josefina contributes nothing while she is working part time but resumes when she returns to full-time employment. This figure factors in regular raises for both Jonathon and Josefina.
In addition, Caves projects that the couple will accumulate an additional $193,000 through future Roth IRAs.
Together, those sources will provide about $3.75 million on their projected 2029 retirement date. Assuming they live 30 more years after that, that amount would provide an income of $170,000 annually at a 5.5% interest rate, or $70,000 in today’s dollars if there is an average 3% inflation rate. These numbers are examples--inflation and interest rates are impossible to predict--and assume an investment portfolio that keeps ahead of inflation. The couple could also tap capital as they age.
A $70,000 income is less than what they currently earn, but it should be more than enough for retirement, the couple anticipate. That’s because many current expenses are likely to disappear--their home will be paid off and their children will be self-sufficient, for example. In addition, they can expect to receive Social Security benefits to bolster their retirement income.
To increase the chances of this scenario, Caves said the couple’s portfolio should be more diversified. Currently, they invest about half their retirement funds in large U.S. stock funds. The rest is equally split among small U.S. stock funds, international stock funds and money market accounts.
Caves suggests that money markets are too conservative for people with a 30-year time frame. And he also thinks the couple’s portfolio could use some diversification with exposure to bond funds and tangible assets, such as real estate and oil and gas, which frequently prove a good hedge against inflation.
The portfolio mix that Caves recommends for the Murrays: 52.5% U.S. equities, split among large, medium and small stocks; 22.5% international equities; 15% bonds; and 10% tangible assets.
As both Josefina and Jonathon’s 401(k) plans have a wide range of choices, much of the tweaking of the portfolio can be done within those accounts. But some of the restructuring must also be done through the couple’s IRAs to invest in categories not available through the 401(k) plans.
Among the stock funds Caves suggests adding includes medium-cap stock fund Sound Shore (five-year average annual return: 18.06%) and T. Rowe Price International Stock (five-year average annual return: 9.05%). For tangible asset exposure, Caves suggests Vanguard Energy (five-year average annual return: 12.97%) and Cohen & Steers Realty (five-year average annual return: 9.49%).
With the exercise complete, the Murrays seem relieved to hear that most of the moves they’ve made so far have been solid and to know that their goal of a reduced work schedule is within reach.
“We have been saving money but we weren’t really sure why we were saving. Now, I feel we have a specific plan to shoot for,” said Josefina.
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This Week’s Make-Over
* Investors: Jonathon and Josefina Murray
* Income: About $120,000 a year
* Goal: Create a plan to allow Josefina to scale back to part-time work
Current Portfolio
* Savings: $10,000 in money market
* Children’s custodial accounts: $11,500 in money market
* Roth IRAs: $14,000 in money market
* Company 401(k)s: $57,000 invested in equity mutual funds
Recommendations
* Move IRA and college fund investments to more aggressive investments.
* Create more short-term savings by stopping surplus mortgage payments and Roth IRA contributions and reducing 401(k) contributions.
* Stop contributions to children’s custodial accounts.
* Increase diversification in investments.
Recommended Mutual Fund Purchases
* Sound Shore(800) 551-1980
* T. Rowe Price International Equity: (800) 638-5660
* Vanguard Specialized Energy: (800) 662-7447
* Cohen & Steers Realty Fund: (800) 437-9912
Meet the Planner
Preston Caves is a fee-only certified financial planner and chartered financial analyst. His firm, Caves & Associates in Manhattan Beach, specializes in investment management consulting for retirement plans and large private portfolios. Caves also helps people with special financial planning needs such as business owners and individuals with high net worth.
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Graham Witherall is a regular contributor to The Times. Helaine Olen contributed to this column. To be considered for a published Money Make-Over, send your name, age, phone number, income, assets and financial goals to Money Make-Over, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or to money@latimes.com. You can save a step and print or download the questionnaire at https://www.latimes.com/makeoverform.
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Information on choosing a financial planner is available at The Times’ Web site at https://www.latimes.com/finplan. The site offers stories, phone numbers, addresses and links to related sites.
