Their Dream: Stay Home With the Kids

Aaron and Sera Eder believe it takes an actively engaged couple to raise a family. So Sera, 32, plans to quit work once they start having kids, and Aaron, 35, wants to retire early so that he can spend time with them before they leave the nest. The rub: Both parents would be jobless long before normal retirement age.

Aaron and Sera are civil engineers from Gresham, Ore. Aaron wants to work only until he's 50; at the latest, 55. That would give him 15 to 20 years to accumulate enough to support the family, cover health expenses and provide for old age.

Can he and Sera pull it off? Not easily, but Aaron says they can because they're thrifty. In five years, he and Sera have bought a house, erased $10,000 in credit-card debt, banked $20,000 and amassed $165,000 in investments, mostly in Roth IRAs and in Aaron's 401(k). Nearly all of the retirement money is in solid stock funds and quality stocks. About 10% is in the stock of Aaron's privately held engineering firm. Neither he nor Sera has a pension.

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For their plan to work, Aaron and Sera must save diligently and live frugally. Assuming that Sera contributes to her Roth for two more years and that Aaron maxes out his Roth and 401(k) pay-ins, they could amass $1.2 million in 15 years or $1.9 million in 20. That assumes an 8% annual return and 3% yearly boosts in Aaron's contributions. As millionaires, surely they will have no trouble running a household without a salary, right?

Tight budget

Not so fast. In today's dollars, the Eders are "looking at total monthly spending of $2,500 to $4,000," says Jon Guyton, of Cornerstone Wealth Advisors, in Edina, Minn. Suppose they withdraw 4% to 5% each year. Based on their projected savings, the couple could draw roughly $4,000 to $8,000 a month. But that's before income taxes and the 10% penalty on early payouts from IRAs and 401(k) plans, so there isn't much room for error.

The Eders' plan may be a pipe dream unless Aaron's income or his firm's stock rises sharply. Otherwise, the Eders will quickly deplete their nest egg.

There are ways to stretch tax-deferred investments. Aaron can avoid the 10% early-withdrawal penalty by rolling his 401(k) into an IRA and taking equal payments over an IRS-designated life span. Under the most generous IRS formula, Aaron, who should have about $800,000 in his 401(k) by age 50, could withdraw up to $69,000 a year penalty-free. If the investments don't continue to earn 8%, the money won't last 30 years. Clearly, the chance of exhausting their savings when Aaron and Sera are in their seventies or eighties is a problem. It means they'll either have to save more or spend less. (They can withdraw their Roth-IRA contributions at any time without having to pay taxes.)

Sophie Kaluziak, of Vista Financial Planning, in Oak Park, Ill., says Aaron and Sera have nothing to lose by testing the plan. "There's no harm in maxing out savings," she says. "When they're 45, they'll have lots of options."

Stumped by your investments? Write to us at portfoliodoc@kiplinger.com.

Kosnett is the editor of Kiplinger Investing for Income and writes the "Cash in Hand" column for Kiplinger Personal Finance. He is an income-investing expert who covers bonds, real estate investment trusts, oil and gas income deals, dividend stocks and anything else that pays interest and dividends. He joined Kiplinger in 1981 after six years in newspapers, including the Baltimore Sun. He is a 1976 journalism graduate from the Medill School at Northwestern University and completed an executive program at the Carnegie-Mellon University business school in 1978.