Lessons learned from one family’s failed financial model
Photo by Newton Free Library on Flickr.com
The New York Times recently profiled a family whose life plans, underwritten by careful financial planning, were thrown for a loop by the recession. The patriarch protagonist, Steve Diamond, decided to retire five years ago at the age of 55:
“I spent a couple of weeks constructing a financial model to demonstrate whether we could live on the assets we’d accumulated. And we could.” via “The Family That Job-Hunts Together” at NYTimes.com
Mr. Diamond, a successful actuary for Fortune 500 companies, concluded that the benefits of retirement outweighed the risks and uncertainties.
You’ve probably already recognized the hitch in this particular model (it rhymes with tub crime). But you should also know that this probably wasn’t the first Diamond family financial model. Decades earlier, Steve and his wife, Andrea, likely sat down and after some discussion and maybe even some number crunching, decided that it would be best for Mrs. Diamond to be a stay-at-home-mom. Mrs. Diamond could have found work—she has a master’s degree in library science—but after paying for child care, transportation, and a professional wardrobe maybe it didn’t seem worth it. Or maybe having a parent at home was really important to the Diamond’s. In any case, the Times article tells us that “Mr. Diamond’s success allowed his wife to stay home, raise the boys and volunteer for several boards.”
While the article focuses on the Diamonds’ recession-dashed retirement dreams—the parallel collapse of the economy and Mr. Diamond’s financial assets model—perhaps it should have spent a little more time on the first Diamond family financial calculation: Mrs. Diamond’s decision to stay home.
The decision for a woman to stay home is culturally contentious: some say it’s in the best interest of the family while others argue that it’s an out-dated gender role and not truly a “choice” at all.
With all this theoretical squabbling about what’s best for society, we’ve neglected to consider what’s safe for families. With their retirement savings in free-fall and two of their college-educated sons moving back home, Mrs. Diamond is now looking for full-time work—but her 25-year resume gap doesn’t make it easy. Not to add salt to the wound, but had the Diamonds’ initial model factored in 401(k)s from two 30-year careers, instead of just one, they might have more retirement savings to draw on today.
Still, Mr. Diamond believes that if there is a flaw in his financial models, it’s in his retirement calculations: “I feel bad about Andrea having to go back to work,” he said. “If I had a job, none of this would be going on.” You want to tell Mr. Diamond that his guilt is misplaced—no one saw this coming—but even The New York Times implies that if Mrs. Diamond works, Mr. Diamond is a failure (after all, “Mr. Diamond’s success allowed his wife to stay home”). Mr. Diamond certainly sees it that way. He’s put on weight. He can’t sleep at night.
Tradition, societal expectation and the difficulties of being a dual-earner family in America aside, is it healthy to place the entire burden of providing for a family on one person? I’m no actuary, but feel pretty strongly that the answer is: no, negative, nein. If there’s anything the financial crisis has taught us, it’s the importance of diversifying risk.
- Liz
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There’s a lot to think about in this question.
Women, traditionally, earn far less than men do — still about 75 cents to the dollar. That depresses their Social Security payments in later life (not to mention being a depressing statistic in itself) and, for those husbands who have been high earners, made the choice moot — if he was making plenty of money, why make her miserable doing a lower-paid, even low-paid job, for nothing? That, in itself, is also a reflection of how much women — (some women love to work, see it as a primary marker of identity and pride and make decent wages) — find the whole thing too annoying, certainly with no paid maternity leave, managing kids, housework and commuting. For every woman who thrives on work and earning income, there’s one who can’t wait to quit and stay home, with or without kids.
You’re both young…were you socialized to be wage-earners above and beyond being wives or mothers? Men of every social class and income level know they’ll work life-long and likely become fathers. Some women are still stunned to find it’s really hard and tiring to have a demanding job and kids. So, for many men, it’s still a mark of pride to have a wife stay home if that’s her happiest choice.
Consider the math…Does a woman, who for the bulk of her career earned $25,000 or $40,000 or maybe even $60,000, bring home more in SS payments than the compound interest earned on her accumulated life savings (while Americans have been saving nothing at all for years) or the interest on her accumulated capital at age 65? I doubt it. Today a high-earning CD will being you….2.75%.
There are so many factors in this mix. What if a woman earns $300K a year — and still doesn’t save a dime? It’s not just what you earn, it’s what you save and how you invest it. In a nation where Americans have, for decades, spent more money than they make — i.e. saving nothing at all — what you earn seems as moot as whether a woman adds her income to that pile.
Thanks for the thoughtful comment. You’re certainly right, there are a lot of complicated questions to consider here.
For one thing, I agree that women who have to choose between a low-paying job and staying home shouldn’t be faulted for deciding on the latter. I would never wish a bad job on anyone. But this “choice” still doesn’t solve much. The man in this partnership still has all the pressure of being the sole breadwinner. The woman is still putting herself at great risk financially (in case of divorce, her husband’s illness or death, a recession, etc). I think the answer here is pay equity! Then maybe both men and women will really have a “choice.”
As far as the math, I’m not sure I understand your question. If a woman doesn’t work how is she supposed to have “savings” to invest?
I’m not sure the addition of a woman’s income is a “moot” point (I think the Diamond’s could certainly use it right about now), but I agree that saving needs to be a bigger priority for all couples. Of course, the Diamond’s seemed to have followed the saving prescription pretty well, and still find themselves in a financial jam.
In response to another comment. See in context »My point is that even if a woman is working, but she’s not saving a penny, what value (beyond her SS payments) does her labor offer her and her husband at retirement? If her wage wasn’t high — and possibly interrupted by time off to have and raise kids — neither her savings nor her SS payments may be worth it, balanced by the savings of not hiring babysitters/daycare, etc. and the non-monetary pleasure of spending a lot of time with your children.
The assumption is that if a woman is not working/earning (and also thereby entitled to SS payments as well), her husband is working non-stop, and he is, in effect, saving for both of them. That does, as you point out, put a lot of pressure on him to keep earning, keep an uninterrupted revenue stream, keep saving (a lot, and consistently) and invest wisely and well.
I think smart couples who both work, both save and both invest should each adopt different investment strategies to hedge their bets – i.e. diversify their risk.
The putative value of time/money lies at the heart of this…look at how bitter Madoff’s victims (and others) are at working their whole lives, saving and investing, and now all that time, work and money are gone for good. These days, investing can feel scary as hell.
Caitlin, why do you assume that the woman would have had a “low-paying job?” Even with pay inequity, women pull down respectable salaries. And they have a track record to fall back own.
Now the wife is at a bigger disadvantage: she is an older worker with a big gap in her employment history. She’s competing against peers who stayed in the workforce, as well as younger workers.
When I read the story,I had another question. I wondered whether the family used the spreadsheets to justify decision they’d already made.
I think there is more to the concept of “should the wife have worked” here.
Before I rebut, I will say I appreciate the feminism in the argument. My education was equal to my husbands, and we both worked at first. At times, I made more than he did. We diversified our retirement investments with my strategies differing from his, as in a pointer above. At times, he refused overtime to be the one to pick up the kids so I could work late when my job seemed more fast track than his. We split household chores as well. Work was rewarding in many ways.
What went wrong?
Healthcare. Despite double coverage from two employers, our youngest has mental disabilities, and that was crippling to two careers. He is not that different from the girl Jani profiled in the LA Times. Lifetime caps were quickly reached, and one of us quitting to provide in-home care was needed. What care is available is limited, far away, and prohibitively expensive even for the income of two people with advanced degrees and about 10 years experience.
Since caring for the ill and elderly is still an almost exclusively female duty, that was me. I had already gone to part time contracting to be more available in case of daycare emergencies and specialist visits, so by then my career was the least fast track of the two as well. My husband does not like the stress of being the sole breadwinner, excellent point above. This stress is worse now in the poor economy.
All I can say is, thank god neither of our parents need care on top of this. Now ten years later, even if there is reform, and affordable care becomes available for my son (who will need it for life), I will be in the same boat as the wife in the article: well-educated, but late middle-aged and with too long a gap on the resume.
Without addressing the feminist argument, I will say that my wife, even with four kids, could never completely pull the trigger on staying home permanently. One reason is, paying for four kids. But the other is making sure she always had a foot in the employment door if nothing else to keep up her skills in case anything happened to me or my job.