Increase retirement savings or emergency fund savings?

[AsiaTraveler]

It's that time of year again, the annual budget re-vamp. I got a small raise this year, and we are doing okay with staying within our budget, so at least some of it can go to increase savings.

I'd like some input on whether you think we should increase our emergency fund or our retirement savings.

Details on our situation:
I am the primary breadwinner in our family. My 2014 monthly pay will be $3525.60. I am considered self-employed for tax purposes, so we pay 16.5% off the top for Social Security/Medicare. This also means that if I were to lose my job, I would be ineligible for unemployment. We have low income taxes though, because anything (well, anything reasonable) we pay for housing is not subject to income tax.

My husband works very part time as well as being the stay at home parent. He earns $75-150/month, but we only count on $100/month (we bank the rest to even out any times when he doesn't get as many hours).

Right now, we have about $10,000 saved in our emergency fund and put in another $100/month. That's about 3 months of my income, but in an emergency, we could get expenses down to $2500/month, making that about 4 months of living expenses. We do save separately for things like house & auto repairs, so unless something catastrophic happened with one of those, the emergency fund isn't going for those sorts of things.

We put in $200/month to my 403(b) account through work (similar to a 401(k). We have ~$31,000 in that account. My husband doesn't have a separate retirement account right now. I am 33, and my husband is 34. In addition, I will qualify for a defined benefit (pension) when I retire; I am vested with my current employer, so I will receive *something* when I retire, even if I left this line of work right now. I am not sure how much I can expect to receive or what the pension will look like by the time I retire, but it exists.

We are debt free except for our mortgage and my husband's student loan debt. We are paying an extra $50/month on the student loan debt to accelerate that being paid off. Because of the unique situation with our housing expenses being tax free and our low interest rate, I don't find it advantageous to pay ahead on our mortgage right now.

What would you prioritize- emergency fund or retirement fund?

[creditcardfree]

You have an emergency fund, so I would definitely prioritize retirement. Try to get up to 10% of your income, or more. You cannot borrow for retirement and the earlier you save the better.

[TBH]

I agree. You seem like you are doing well, but you have some catching up to do on you retirement savings. I would increase your contributions.

Is this a long-term plan, having your husband work so few hours? When your kids are older, will he work more?

[AsiaTraveler]

Is this a long-term plan, having your husband work so few hours? When your kids are older, will he work more?

My husband suffers from chronic back pain, and right now can only work 4 hours at a time. That limits his opportunities for employment, even if he worked every day.

Our son is 2.5 and we're expecting, so any opportunity for him to work more is probably 5 years away. We haven't really made a plan for that point in life.

[AsiaTraveler]

So far, the general consensus seems to be to increase retirement savings.

Any thoughts about whether I should contribute more to my 403(b) plan through work, open a ROTH IRA in my name, open an account in my husband's name, or....?

[creditcardfree]

I'd probably open a Roth for both of you. Split the amount you want to contribute equally. Look for low cost funds, such as Vanguard and T Rowe Price. If you get any matching with your employer, that you aren't already getting, I probably money into that option before the Roth, but only up to the matching portion.

[kork13]

I'd probably open a Roth for both of you. Split the amount you want to contribute equally. Look for low cost funds, such as Vanguard and T Rowe Price. If you get any matching with your employer, that you aren't already getting, I probably money into that option before the Roth, but only up to the matching portion.

Agree 100% with this.

However, it also doesn't need to be an all-or-nothing arrangement. I think your EF also needs some bulking up (getting it up to at least 6 months), given your family's reliance on your income with no possibility of unemployment benefits as a backstop, so I would split priorities. If maxing out 2 Roth IRAs is possible for you ($916.66/mo), that should definitely be your priority. However, I would say that any additional money available should also go to your EF -- since his income is low & somewhat irregular, perhaps consider sending whatever he earns each month (whether $100 or $300) to your EF. (You didn't mention how much extra per month you're looking at saving, so not sure how far we can go with our suggestions)

If necessary, you might also consider looking at creative ways your husband can earn more from home, where he can work at his own pace & without the strain of commuting and working in an office. There are alot of varied options, it just depends on his interests, abilities, willingness, time available, and creativity. Side note, does your husband qualify for SSDI? If he is truly that limited by his back injury, SSDI might be an option to consider.

[AsiaTraveler]

I'd probably open a Roth for both of you. Split the amount you want to contribute equally. Look for low cost funds, such as Vanguard and T Rowe Price. If you get any matching with your employer, that you aren't already getting, I probably money into that option before the Roth, but only up to the matching portion.

Matching funds through my employer is already maxed out and is actually disappearing as of July 1st.

But that did remind me of one pertinent detail: Right now, through my employer, I qualify for a defined benefit plan (pension) when I retire. I have no idea what that will look like when I actually retire,and I sort of expect it to be phased out over my lifetime. (If/when they phase it out, I have no idea how that will be managed; whether I would get a lump sum addition to my 403(b) or what.) Sorry I didn't include that in my initial post; it just wasn't on my brain.

[AsiaTraveler]

Agree 100% with this.

However, it also doesn't need to be an all-or-nothing arrangement. I think your EF also needs some bulking up, so I would split priorities. If maxing out 2 Roth IRAs is possible for you ($916.66/mo), that should definitely be your priority. However, I would say that with any additional money available should also go to your EF -- since his income is low & somewhat irregular, perhaps consider sending whatever he earns each month (whether $100 or $300) to your EF. (You didn't mention how much extra per month you're looking at saving, so not sure how far we can go with our suggestions)

If necessary, you might also consider looking at creative ways your husband can earn more from home, where he can work at his own pace & without the strain of commuting and working in an office. There are alot of varied options, it just depends on his interests, abilities, willingness, time available, and creativity. Side note, does your husband qualify for SSDI? If he is truly that limited by his back injury, SSDI might be an option to consider.

There is no way we could max out 2 ROTHs. Looks like we could possibly put an additional $50-100/month towards retirement at this point.

We haven't attempted to qualify my husband for SSDI, but we've heard a lot of horror stories about trying to qualify with a back pain claim. We've been working additional avenues of treatment at this point, but so far nothing seems to be working. Even if he were 100% healthy, though, our primary focus would be on him being the primary childcare provider/household manager. (Yes, if he were 100% healthy, he would also have additional ability/energy to pursue more at-home work options.)

[creditcardfree]

If there is no match, open up Roth IRAs. Vanguard has $1000 minimum for Target and STAR funds. Other funds start at $3000. I'm not familiar with the minimums of other companies. You might have to start one for one you first just to get to the minimum needed to open it.

My husband is military and should get a retirement check, if he completes his time, but that still has to be determined. We invest as though it won't exist. It's nice to know something (a defined benefit plan) might be there in addition to what you save in your retirement account.

[snafu]

Asia Traveler, I think access to a defined pension in the future is too important to be left out of your financial record keeping. I suggest contacting HR to determine your current vested benefit and payout system like earliest @ age X. Is it roll-over able should you ever change employers sometime in the future

Are you fully funded for maternity leave?

[iWilliams311]

Save Up for Retirement

Since you already have an emergency fund, it just makes sense to start focusing on your retirement nest egg. If you read about the topic online, lots of studies reveal that very few Americans feel confident about their financial status after reaching retirement age. Worse, there are many who receive the shock of their lives when, after retiring, they find out that their lifesavings is barely enough to fund post-retirement healthcare/long-term care needs. So, I think looking into your options for long-term care, like long-term care insurance or annuities with LTC riders should be included in your retirement planning/saving.

[Joe Moore]

Have you considered getting credit cards for emergencies? Having credit cards that can be used in case of emergencies would allow you more freedom. Remember that if you lose your job or something like that you may find it hard to get credit cards as well. So, I would suggest you use your current good credit and get one or two cards with decent credit limits. You seem to be able to manage your finances well. So, it is unlikely that you will act irresponsible with your cards.

In your case, I would invest on life insurance as well. Your husband has a condition that prevents him working long hours. If something happens to breadwinner (you), he would struggle with two young children. So, look into life insurance first, if you have not already done so.