Trading Places: Who should go to work?

A young couple explores the option of a stay-at-home dad.

The Facts

Married couple, Age: 35
John's earnings: $40,000
Mary's earnings: $80,000

John's 401K savings: $15,000
Mary's 401K savings: $5,000
John's Contributions: $2,000 (when working)
Mary's Contrbutions: $4,000 (when working)

John and Mary want to know what kind of impact it would have on their finances—current and future—if John were to leave his $40,000 a year job now and stay at home with their child for the next five years while Mary returns to work at $80,000 per year. This might improve their household living standard, but by how much?

The Base Plan

John continues to work while Mary stays home for five years

John and Mary create a Base Plan. This enables them to test a scenario where Mary stays home, John works at $40,000 for the next five years and Mary then returns to work in five years at $80,000.
Their Base Plan shows that over the initial five-year period they will have $23,392 in annual discretionary spending. Discretionary spending is the amount left over to spend each year after paying fixed expenses: taxes, housing costs, and Medicare Plan B costs (in their retirement years).

When Mary goes back to work, the annual discretionary spending will rise to $70,160 while the child is still at home, and then, when the child leaves the home, settle in at an even $57,242 per year through age 100. This changing discretionary spending level is shown by the orange line in the chart below. The discretionary spending amount is in "today's dollars," which means it's adjusted for inflation each year and it remains relatively steady even though income and fixed spending changes a lot.

The What-If Plan

A stay at home dad for five years

If they run the program again but this time indicate that John stays home and Mary goes back to work, they will, for the next five years, have $50,095 for discretionary spending. This is much higher than the $23,392 for that same initial five-year time period in their Base Plan.

When John joins Mary in the workforce after five years, and after the child leaves home, they settle into a smooth $58,638 in discretionary spending as seen in the orange line in the chart below. That's $1,396 more to spend each year, adjusted for inflation, for the rest of their lives—2.4% more to spend each year than they would have for that same time period in the first scenario. Again, when the child is in the home, the orange line in the chart reveals that more money is provided for the household to keep the two adults at the same standard of living they will have when the child leaves home.

How Does this Plan Work?

Mary's salary is higher than John's. Therefore she is able to contribute more to retirement and will earn more Social Security credits, a benefit which pays off when she reaches 66, her age of full retirement. For example, with John working and Mary doing childcare for the next five years, their combined Social Security income is $49,904. This benefit amount goes up to $52,198 if John does the childcare and Mary goes back to work. Likewise, their combined retirement savings will go up from $214,252 to $261,066 by age 66 under the "Mary works now" arrangement.

The Bottom Line

The near-term benefits are obviously significant, and this initial five-year period alone may seal the deal for them. But looking at the long term, from five years out through the end of life, they must ask themselves if a 2.4% lifetime raise in living standard is worth making the switch? The $1,396 annual raise is inflation adjusted, and this will remain through age 100. For some couples, this inflation-adjusted $116 per month for the rest of their lives would mean a lot; for others it may seem not so significant. In the end, the decision is about who wants to work, who would enjoy the childcare the most, and other family-related values. But given the power of MaxiFi software, they now know the lifetime economic consequences for their household.

Every household economy is unique, and MaxiFi will help you to explore many options. But most importantly, you are not comparing "theories" or "rules of thumb," you are using accurate numbers to compare the real, annual impact on your living standard.