Saving for the future while staying at home

Today, it's increasingly common for people to spend time outside the workforce for any number of reasons - such as to raise children, care for a parent or even write a novel. On top of the many emotional issues often associated with this decision, there are important financial aspects to consider beyond the loss of income and need for day-to-day belt tightening.

Leaving the workforce often means putting your 401(k) or other company-provided retirement plan on hold. It also means a smaller Social Security benefit in the future because that benefit is dependent on how much you earn and how many years you work. And if you are married or have a domestic partner, you now face funding two retirements out of one income, all of which can have significant implications for your cash flow in retirement and thus for your lifestyle in retirement. Fortunately, there are a few simple steps I think you can take to help keep your retirement savings on track.

If you are currently working but expect to leave the workforce in the future, maximize what you are contributing today to your 401(k), 403(b) or other employer-provided retirement plan. Remember, if you are age 50 or older, you are entitled to make an additional contribution of up to $5,000 in 2008.

Similarly, open an IRA now and make the maximum annual contribution permissible. Your financial adviser can help you determine an appropriate type of IRA for your situation. And, if you decide to go back to work, try and contribute the maximum to your retirement plan each year thereafter.

Once you decide to leave the work force, don't cash out your 401(k) or other employer-sponsored retirement plan. Your financial adviser can help you evaluate whether to leave the money in your employer's plan or transfer the funds to a rollover IRA. Remember, a trustee-to-trustee transfer typically is the best way to avoid unintended tax consequences.

If you are married and not employed, work with your spouse and financial adviser to set up a spousal IRA. A non-working spouse can make an IRA contribution of up to $5,000 in 2008 if under age 50, or $6,000 if age 50 or older, as long as the couple files a joint return and the working spouse has enough earned income to cover the combined total of both spouses' IRA contributions.

So, if you contribute $5,000 to one IRA and you want to contribute another $5,000 to a spousal IRA, then you need to have at least $10,000 in earned income to cover both contributions.

The deductibility of the spousal IRA contribution depends on a couple's adjusted gross income, so you should consult with your tax adviser about your situation. One thing to keep in mind: Even though you are using your spouse's earned income to qualify, the account will be in your name. Also, if you opened an IRA while employed, you can use it for your spousal IRA contribution.

Regardless of where you are today, make sure that your family has adequate life insurance coverage. Many of us are reluctant to talk about certain "what ifs" because we worry that just saying the words will make them a reality. So, we assume that our spouse or partner has taken care of things, and we turn a blind eye to stories about families left in desperate financial straits after a tragedy.

Women in particular should pay close attention to life insurance, as they are statistically more likely to live longer and be left responsible for managing their family's finances. The general rule of thumb is that life insurance coverage should equal eight to 10 times the total household income. However, you should consult with a knowledgeable professional to determine an appropriate level of coverage for you and your spouse or partner given your family's situation.

Successful retirement planning is a family affair and should take into consideration the individual goals and needs of both the working and non-working spouse. Develop a plan that fits your family's needs and work with your tax adviser to help you take advantage of all applicable tax provisions.

• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of Morgan Stanley Smith Barney LLC. He can be reached at William.a.creek baum@smithbarney.com or 689-8704.