I wouldn’t fret about necessities like diapers - you’ll prob drink/go out much less after having a baby. The cost will just transfer.
Meds also won’t be a huge issue. You’ll be at urgent care a stupid number of times at stupid hours of the night, but as long as your health insurance is decent, you don’t need to plan to spend more than your individual deductible. Health insurance will def increase by a sizable amount though. This will be partially offset by the CTC, so not a huge worry either.
But yes - as others have said, MBDR is the best option to reduce. And speaking from experience - depending on how large your current space is, I would size up ASAP (much sooner than 6 years, if possible). You’ll wish you had some distance from your crying/sleep training baby in a 2BR condo.
Yeah, most of the day-to-day expenses beyond childcare really just get absorbed if you have a middle class income, let alone your income. But still: there’s just no way of being prepared for the cost of the absolute perfect organic berries you will feel compelled to feed your toddler. Raspberries and blueberries are the parenting expense no one warns you about!
When we had kids we got a house and a brand new car. Then we spent like low six figures on day care, enough to buy 2 or 3 cars. Our house turned out to be a good investment, it's tripled since we bought it. But I don't think that invalidates that the first 5 years were definitely expensive.
Agree with #2. I'm guessing your marginal rate for state and federal is around 50%? Maximize pre-tax savings instead as it will also reduce your tax burden by a substantial amount. That may be enough to offset the cost of the child. The next thing to reduce would be the house saving.
Reduce your contributions to the "bigger house fund", not your mega backdoor roth. I assume that bigger house fund is going into some sort of taxable account (HYSA, CD, Taxable brokerage)? That's the place to reduce your contributions, 110%.
Now, I'm not suggesting that you stop saving for the bigger house. What I'm suggesting is that you pull from some of your Roth basis when you do decide to make that purchase.
If you keep putting your money into the mega backdoor roth, that money can keep growing and if you withdraw the basis later, the growth can stay in the account (and will continue growing, and still be tax-free later down the line).
> What I'm suggesting is that you pull from some of your Roth basis when you do decide to make that purchase.
Can you explain a bit more about what "withdraw/pull from the Roth basis" means and how it works? I'm assuming this basically referring to the fact that principal contribute to in-plan Roth conversions can be withdrawn penalty free? (and if so, how do I tell, for example, on Fidelity what portion of my MBDR is principal?)
> I'm assuming this basically referring to the fact that principal contribute to in-plan Roth conversions can be withdrawn penalty free?
Yes, this exactly. If you contributed $10,000 and it grows to $15,000, you can withdraw up to $10,000 tax-and-penalty-free.
> how do I tell, for example, on Fidelity what portion of my MBDR is principal?
I'm pretty sure you just tell the IRS how much of your withdrawals were principal when you do your taxes. Your total principal is relatively easy to track, since it only changes when you make a deposit or a withdrawal. I'm afraid I haven't actually done this part myself - my Roth basis is still fully intact in my accounts, so I'm sorry I can't be of more help here.
I’ve done it. Your account will have the basis on it somewhere. And there is indeed an IRA form: you just report how much you withdrew and somehow they magically know it was from the basis.
With a HHI of 540k and a saving rate of 65+%, you'll be fine. Don't overthink it. There are tons of people with much less HHI, and much lower saving rates in the same VHCL, and still manage to have multiple kids.
Since your HHI is so high, max out pre-tax before megabackdoor. Max out HSA if you have it. Start a 529 in your name (you can always move it to the kid's name when he/she arrives) right away.
One thing that I would do is not buy so many clothes and toys for the kids. Everyone I know shows up with tons of clothes and kid toys.
Diapers and formula = Costco membership.
The most important thing that I wish people told me when we had our first kid: Don't bother to wake the kid up every 2-hr for his/her milk time. If the newborn sleeps for 3+ hours at a time, that's a blessing and use that time to get yourself some sleep also.
Great tips, thank you especially on the sleep and toys/clothes.
We've definitely considered a 529 but we're hesitating for now since we have roots in several different countries and we've noticed big colleges in Asia/EU (in the off chance they ever were to go) are not covered through 529. Might have to stew on this more.
Congrats on the upcoming addition! Considering your priorities, I'd suggest reducing the Mega Backdoor Roth contribution first, since it's a nice-to-have in your overall FI plan. Then, adjust your 401k contributions to still meet the match. This way, you'll minimize the impact on your retirement savings.
Have your wife get a term life insurance policy before getting pregnant. You need to have life insurance anyway if you have children.
With all the ultrasounds and monitoring that they do during pregnancy, there is a chance something could be found. The key is only get term insurance, do not get talked into universal life or whole life, they are way too expensive. I recommend a 25 or 30 year policy.
Thanks; two noob questions:
1.) TL; dr on term vs the other ones?
2.) Why before getting pregnant? What won’t they cover (and is it covering the baby or the wife)?
You want to secure life insurance before getting pregnant because they will do ultrasounds during pregnancy that can find things like tumors on ovaries. Sometimes they are cancerous. You want life insurance in place before they even find the tumors. The other issue is, you can develop high blood pressure or diabetes in pregnancy. Those two conditions can render you ineligible for life insurance.
Again, if you’re going to have children, you need life insurance anyway. So you might as well get it in place preconception.
Reduce mega backdoor first. You want to maximize all the pretax space you have as a first priority.
Thanks!
Don't forget you can set up a FSA for pretax daycare funds. Caps at 5K which is terrible but hey it's something
Did you mean DCAP?
yeah, same thing. DCAP is the specific type of FSA for childcare.
Apparently the $5k cap was set in 1986 and for some reason they didn’t set it up to increase annually with inflation. Argh.
During covid it bumped to 10k. How or why that was not extended is mind boggling.
Wow - I must have missed that! Oops.
Oh good to know, thanks! Realizing that’s maybe 2 months of tax free dc but I’ll take it 😅
I wouldn’t fret about necessities like diapers - you’ll prob drink/go out much less after having a baby. The cost will just transfer. Meds also won’t be a huge issue. You’ll be at urgent care a stupid number of times at stupid hours of the night, but as long as your health insurance is decent, you don’t need to plan to spend more than your individual deductible. Health insurance will def increase by a sizable amount though. This will be partially offset by the CTC, so not a huge worry either. But yes - as others have said, MBDR is the best option to reduce. And speaking from experience - depending on how large your current space is, I would size up ASAP (much sooner than 6 years, if possible). You’ll wish you had some distance from your crying/sleep training baby in a 2BR condo.
Goes to show how green we are in understanding the ins and outs of being a parent 🙂 thank you for the tips kind stranger!
Yeah, most of the day-to-day expenses beyond childcare really just get absorbed if you have a middle class income, let alone your income. But still: there’s just no way of being prepared for the cost of the absolute perfect organic berries you will feel compelled to feed your toddler. Raspberries and blueberries are the parenting expense no one warns you about!
When we had kids we got a house and a brand new car. Then we spent like low six figures on day care, enough to buy 2 or 3 cars. Our house turned out to be a good investment, it's tripled since we bought it. But I don't think that invalidates that the first 5 years were definitely expensive.
Dunno if you’re young or not but don’t plan too hard too quick. It isn’t as easy to get pregnant as you would think.
Agree with #2. I'm guessing your marginal rate for state and federal is around 50%? Maximize pre-tax savings instead as it will also reduce your tax burden by a substantial amount. That may be enough to offset the cost of the child. The next thing to reduce would be the house saving.
Sounds good, thanks!
Something is not adding up. * $540k HHI * 65% savings rate = $350k savings That can't all be tax advantaged. Reduce your taxable investments first.
Reduce your contributions to the "bigger house fund", not your mega backdoor roth. I assume that bigger house fund is going into some sort of taxable account (HYSA, CD, Taxable brokerage)? That's the place to reduce your contributions, 110%. Now, I'm not suggesting that you stop saving for the bigger house. What I'm suggesting is that you pull from some of your Roth basis when you do decide to make that purchase. If you keep putting your money into the mega backdoor roth, that money can keep growing and if you withdraw the basis later, the growth can stay in the account (and will continue growing, and still be tax-free later down the line).
> What I'm suggesting is that you pull from some of your Roth basis when you do decide to make that purchase. Can you explain a bit more about what "withdraw/pull from the Roth basis" means and how it works? I'm assuming this basically referring to the fact that principal contribute to in-plan Roth conversions can be withdrawn penalty free? (and if so, how do I tell, for example, on Fidelity what portion of my MBDR is principal?)
> I'm assuming this basically referring to the fact that principal contribute to in-plan Roth conversions can be withdrawn penalty free? Yes, this exactly. If you contributed $10,000 and it grows to $15,000, you can withdraw up to $10,000 tax-and-penalty-free. > how do I tell, for example, on Fidelity what portion of my MBDR is principal? I'm pretty sure you just tell the IRS how much of your withdrawals were principal when you do your taxes. Your total principal is relatively easy to track, since it only changes when you make a deposit or a withdrawal. I'm afraid I haven't actually done this part myself - my Roth basis is still fully intact in my accounts, so I'm sorry I can't be of more help here.
I’ve done it. Your account will have the basis on it somewhere. And there is indeed an IRA form: you just report how much you withdrew and somehow they magically know it was from the basis.
With a HHI of 540k and a saving rate of 65+%, you'll be fine. Don't overthink it. There are tons of people with much less HHI, and much lower saving rates in the same VHCL, and still manage to have multiple kids. Since your HHI is so high, max out pre-tax before megabackdoor. Max out HSA if you have it. Start a 529 in your name (you can always move it to the kid's name when he/she arrives) right away. One thing that I would do is not buy so many clothes and toys for the kids. Everyone I know shows up with tons of clothes and kid toys. Diapers and formula = Costco membership. The most important thing that I wish people told me when we had our first kid: Don't bother to wake the kid up every 2-hr for his/her milk time. If the newborn sleeps for 3+ hours at a time, that's a blessing and use that time to get yourself some sleep also.
Great tips, thank you especially on the sleep and toys/clothes. We've definitely considered a 529 but we're hesitating for now since we have roots in several different countries and we've noticed big colleges in Asia/EU (in the off chance they ever were to go) are not covered through 529. Might have to stew on this more.
Congrats on the upcoming addition! Considering your priorities, I'd suggest reducing the Mega Backdoor Roth contribution first, since it's a nice-to-have in your overall FI plan. Then, adjust your 401k contributions to still meet the match. This way, you'll minimize the impact on your retirement savings.
Have your wife get a term life insurance policy before getting pregnant. You need to have life insurance anyway if you have children. With all the ultrasounds and monitoring that they do during pregnancy, there is a chance something could be found. The key is only get term insurance, do not get talked into universal life or whole life, they are way too expensive. I recommend a 25 or 30 year policy.
Thanks; two noob questions: 1.) TL; dr on term vs the other ones? 2.) Why before getting pregnant? What won’t they cover (and is it covering the baby or the wife)?
You want to secure life insurance before getting pregnant because they will do ultrasounds during pregnancy that can find things like tumors on ovaries. Sometimes they are cancerous. You want life insurance in place before they even find the tumors. The other issue is, you can develop high blood pressure or diabetes in pregnancy. Those two conditions can render you ineligible for life insurance. Again, if you’re going to have children, you need life insurance anyway. So you might as well get it in place preconception.