Going From a Two-Income Family to a One-Income Family
Families in which both spouses/partners work outside the home have been the norm in the U.S. for decades. There are many well-documented reasons for this, and two-income families enjoy many benefits – financial, professional, and personal – although there certainly are well-known challenges involved.
Still, many families – noting that “family” includes couples with no children, as well as couples whose children are now adults – choose to live on one income. That can also be a rewarding, fulfilling arrangement, with its own set of challenges. In this article, we discuss critical financial considerations and touch on some of the emotional issues that can arise when couples that live under one roof choose to live on a single income.
There are many circumstances and life changes that motivate the decision to switch from being a two-income family to a one-income family. Often, the couple wants to have one parent available to spend more time with children at home. It is not unusual for couples with preschool-age children to discover that the lower-earning spouse’s after-tax income is entirely consumed by childcare costs when all work-related expenses are considered.
In other cases, one spouse may temporarily leave the workforce to pursue training to make a career switch or care for very young children. Sometimes, families move overseas so that one spouse can seek a compelling career opportunity, and the other spouse may be unable to work in the new location legally. Or, the change may be seen as permanent – if one spouse’s income is more than sufficient to support the family, this choice can create flexibility that allows them to spend more time together (with fewer problems coordinating their schedules).
Can you afford to do this?
If you and your partner are considering this change but have not yet determined whether you can afford to move forward, start by figuring out your family’s annual expenses. This tally includes not only expenditures on food, housing costs, and the other things you spend money on each month; it must also include contributions to meet retirement savings goals for both of you, as well as savings you set aside to fund future college educations for your children if that applies to your situation.
Start by reviewing your expenses for at least six months (most banks and credit card issuers provide online tools that categorize expenditures). Be sure to include the year-end holidays in your six-month review period, especially if gift-giving tends to be a significant budget item in your family. Also include the costs of aspirational activities, such as vacations you will want to take, or hobbies the non-working spouse plans to pursue if they involve non-trivial expenses. Then, subtract work-related costs for the spouse who intends to leave the workforce – that could include wardrobe costs, gas and parking associated with commuting, and others. If having a stay-at-home spouse means you can eliminate the cost of childcare for young children, take that into account also.
Consider Insurance Coverage
In determining whether you can afford to make this change, remember to include the cost of adding the soon-to-be non-working spouse to the working spouse’s health insurance plan (becoming unemployed is considered a “life event” that allows you to add a spouse to your medical plan). Factor in the cost of increasing long-term disability insurance for the working spouse. Plan to take out additional life insurance if the spouse who would be leaving the workforce had been covered under a work plan. Why? Even though the death of the non-working spouse would not decrease the family’s income, there would be non-trivial costs incurred to hire someone to handle activities such as grocery shopping, cooking, and laundry that still need to be done.
Do a “Dress Rehearsal”
If this review of your family’s expenses indicates that living on one income is feasible, try it out! For six months – including the holidays – live on the take-home pay earned by the spouse that will continue to work and save the paycheck earned by the spouse who plans to stop working. Often, it makes sense to earmark that “extra” paycheck to increase the family’s emergency fund to cover up to 12 months of living expenses. This decision is prudent, given that if the working spouse were to become unemployed for a time, the family would have no income. If your cash reserves are already sufficient, use that paycheck to contribute to educational savings accounts or to fund Roth IRAs if you are eligible. Use this trial period to work through any financial issues that arise.
Making the Change – Handling Spending and Retirement Savings
If you decide to move forward after the six-month trial period, establish joint checking and credit card accounts if you did not previously have them. This action ensures that the non-working spouse will continue to maintain a credit history. As a part of this, couples need to discuss their joint spending, which they may not have done when both were earning their paychecks. This conversation may involve setting a threshold amount – any purchase that would exceed that amount requires a conversation.
Focus on the now non-working spouse’s retirement savings, current, and future. If the spouse leaving the workforce has one or more 401(k)s from past employers, consider rolling them over to a Traditional IRA. Why not just leave them where they are, which most employers allow? For starters, 401(k) plans often have limited investment options that carry relatively high management fees, and these plans may charge hefty administrative costs. When you transfer the balance to an IRA, you may be able to substantially reduce the fees you pay, which translates into more significant savings in the long term. You can also access a broader range of investment vehicles that may be better suited to your needs and can manage your overall retirement portfolios more holistically. A financial advisor can review the pros and cons of staying with a past employer’s 401(k) plan. NOTE: If you consider a Roth conversion from a traditional IRA, seek advice from a financial advisor or tax expert before rolling over 401(k) money.
Significantly, if you file a joint tax return, both spouses can contribute to their IRAs (Traditional or Roth) based on the working spouse’s income. This contribution preserves or may even increase the combined amount a couple can save in tax-advantaged accounts.
Permanent or temporary?
Sometimes leaving the workforce is intended to be a long-term/permanent change; sometimes, it is expected to be pretty temporary (e.g., to care for young children until they start school). If the change is to be permanent, in addition to the financial issues discussed above, there are several emotional issues to consider. If you leave the workforce, you may feel the loss of a sense of purpose. You may feel resentment toward the spouse who continues to enjoy his/her work. That resentment can flow in the opposite direction, as the spouse who continues to work can feel more pressure as the sole provider. You may no longer need the income, but psychologically it can be challenging to give up working.
If you are leaving the workforce, think about making the transition away from defining who you are by what you do and assessing your value in terms of what you earn. Decide what you want to do next to move toward something, not just leave something behind. Becoming a single-income family can be a profoundly gratifying change, but it requires careful planning, as with most big moves. Before you make the decision, it makes sense to meet with a fee-only financial advisor to assess the long-term impact on your family. An advisor can also work with you on rolling over a 401K to an IRA and any other steps that might be appropriate. We invite you to reach out to us with any financial questions related to becoming a one-income family.