Your Investing Life: Going part-time
September 03, 2013
You're scaling back the number of hours you work outside your home. Whether the choice is yours or your employer's, you're probably wondering how your reduced hours—and pay—will affect your budget.
But other aspects of your investing life that may also be affected by the change might be further down on your list of considerations. These aspects can be easier to manage when you take just a few simple steps.
Review your retirement savings plan
Working part-time doesn't just reduce your income in the short term. It can also lower your Social Security benefits in the long term because they're based on the amount of income you earn—and taxes you pay—during your entire working career. The Social Security Administration's retirement estimator can help you get a handle on how your future benefits might be affected.
Your family life. Your work life. Your investing life.
When "life happens," your financial and investing plans can sometimes get moved to the back burner. These articles can help you bring your investing life—and its effects on your (and your family's) financial future—back to the forefront.
Receiving less in Social Security benefits makes building up your retirement nest egg even more important. So save as early and consistently as you can, whether it's through your employer's plan or a traditional or Roth IRA. These tax-advantaged accounts can often help you reduce the amount you pay Uncle Sam while building up your retirement savings. For information about how to claim IRA deductions, plus current contribution and income limits, visit irs.gov.
Keep in mind that, if you're contributing a percentage of your paycheck to your employer's retirement plan, the amount you save will be based off your (likely lower) part-time pay. That means you'll be contributing less each month to the plan. To compensate for this drop in savings, consider raising your contribution percentage.
"When you have limited resources to invest, it can be hard to determine which financial goals to prioritize," said Karin Risi, leader of Vanguard Advice Services. "Practically speaking, the solution to this dilemma is simple: If you can't afford to fund more than one goal at a time, consider preparing for retirement first."
Check your investment mix
Take a look at the mix of stock, bond, and cash investments (also called "asset classes") you have in your employer's retirement plan, your IRA, or your personal investment portfolio. This mix is known as your asset allocation, which is one of the biggest factors in determining your investment success. Having the right asset allocation can help improve your chances of meeting your goals while lowering your investment risk, such as those that happen during dramatic ups and downs in the market, known as volatility.
Catherine Gordon of Vanguard Investment Strategy Group explained that a well-built portfolio is like a well-built house.
"When it comes to constructing a portfolio, your strategic asset allocation should serve as the foundation," Ms. Gordon wrote in a blog post. "Beyond that, a well-constructed portfolio, as with a well-constructed house, should be balanced."
Finding the right balance for your risk tolerance and time horizon—and having the discipline to stick to it—can help set you on the path to long-term investing success.
Check your health care coverage
The benefits you qualify to receive under your employer's health plan may also change when you shift to a part-time schedule. It's easy for this change to catch you unaware if the coverage threshold is slightly different from what you expect. Check with your HR department to find out the number of hours your employer requires you to work in order to qualify for health insurance benefits. If you're married, have your spouse find out if it's possible to add you to his or her insurance plan.
If you no longer qualify for your employer's plan or can't transfer to your spouse's, prepare for the possibility of higher insurance premiums. It's a good idea to maintain coverage in case of a health emergency.
Tap emergency funds first
You'll still have expenses that might not go down along with your income when you go part-time. You may have to tap into some savings if balancing your budget starts to get tough. Use your emergency fund before drawing on any other savings you have. Try not to cash out any of your retirement account balances, which generally have tax implications, or build up credit card debt, which can be hard to pay off.
If you haven't yet made the move to a part-time schedule but you're considering it, try to build up an emergency fund of at least six months' living expenses. It can help soften the financial blow unexpected expenses—hello, cell phone falling in the sink—can inflict on your budget.
A little careful planning can help you stay on more solid financial footing, even as you pull back to a part-time schedule.
- All investing is subject to risk, including the possible loss of the money you invest.
- Past performance does not guarantee future results.
- There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
- Diversification does not ensure a profit or protect against a loss.
- We recommend that you consult a tax or financial advisor about your individual situation.
- Distributions received from an IRA before you're age 59½ may not be subject to the 10% federal penalty tax if the distribution is due to your disability or death; is distributed by a reservist who was ordered or called to active duty after September 11, 2001, for more than 179 days; or is for a first-time home purchase (lifetime maximum: $10,000), postsecondary education expenses, substantially equal periodic payments taken under IRS guidelines, certain unreimbursed medical expenses, an IRS levy on the IRA, or health insurance premiums (after you've received at least 12 consecutive weeks of unemployment compensation).
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