Being a stay at home parent is an extraordinary calling. Stay at home dads (SAHDs) and stay at home moms (SAHMs) are everyday examples of heroes who don’t wear capes. The calling to be a stay at home spouse can be truly fulfilling. However, there are serious financial risks stay at home parents must be overcome. SAHDs and SAHMs miss out on workplace provided benefits like employer matches to retirement plans and they have limited earning histories. Don’t sacrifice your financial future with a limited credit history or lacking the proper protection for the unexpected. Instead, use this time to be proactive and beat the unique financial risks that stay at home parents face.
Long term risk
Planning for the long term is difficult because it is simply too easy to procrastinate. Just because you don’t collect a weekly paycheck doesn’t mean you are excluded from saving for retirement. Yes, the IRS indeed dictates your IRA contribution may not be greater than your earned income for the year. However, there is a workaround for married couples with only one breadwinner. By filing your tax return jointly, you are permitted to each contribute to your IRAs. Specifically, this workaround allows the contributions if the total does not exceed your joint taxable income. These workaround contributions are still subject to the annual limits for 2020 is $6,000 ($7,000 if you’re age 50 or older).
Beating retirement saving conundrum
Great, SAHDs and SAHMs do have the accessibility to save for retirement. The next question is, how much should you be saving? Good question and the answer is, as much as possible! Even contributing annually to the maximum amount might not be enough to fund retirement. Ouch. Determining how much to save is a logical next step, which we address in the ‘You’re Probably Not Saving Enough for Retirement’ blog post. Spoiler alert, you will likely need to save outside of your IRA, in a taxable account as a SAHD or SAHM to accumulate enough for retirement.
One question you might be asking is, why doesn’t my employed spouse simply increase their 401(k) contribution? Well, unfortunately, the divorce rate is approximately 40-50% in America. No one gets married with the intention of getting divorced. Saving for retirement in your name is a good idea even if you have the best and strongest relationship. If your employed spouse is able to max their 401(k) contribution while you are saving in your name as well, all the better.
Where should all this saving go? Let’s start with the IRA contributions. If, as a couple, you are not in your highest tax bracket years (and are making less than $196,000 annually), then a Roth IRA would be an excellent destination for your savings. In other words, think of a Roth first, if you are not yet in your prime earning years. If you are making more than the $196,000 limit, then your answer is to contribute to a Traditional IRA. Roth conversions are potentially an option down the road.
Now for the saving that you’d like to do on top of the IRA contributions. If the income-earning spouse, is the owner of a business, then your options get a bit more complicated. You may read our ‘Small Business Retirement Plans – What You’re Missing’ blog to check out some of your unique options. Putting small business retirement plans aside, for the time being, the next place to save would be a taxable investment account. Here, the sky’s the limit on how much you can save. The reason this location is mentioned lastly is the tax benefits of saving here are much less than in retirement accounts.
Social Security challenges
As a SAHD or SAHM, you may have a limited employment history. If you have earned enough credits to qualify for Social Security retirement benefits, fantastic! When it comes time to decide your benefit, will you take your benefit or your spouses?
If you didn’t know you have a choice, you do! The decision begins with who has a more substantial Social Security benefit. Technically, you may collect up to 50% of your spouse’s benefit they would receive at their full retirement age. You may not cash in on the delaying benefit. Remember, when you delay your Social Security benefit, annually your benefit increases by 8%. This increase does not apply to spousal benefits. When your retirement benefits are similar, you will receive a more significant benefit by receiving your own, as long as it is greater than 50% of your spouse’s benefit. Plus, by taking your benefit, you can take advantage of the delaying benefit.
What if the unexpected happens?
Planning for the unexpected is a real challenge for SAHDs and SAHMs. The most obvious reason is they do not have access to the standard workplace benefits packages. This means they may not have access to benefits such as short-term disability, long-term disability coverage, and even employer-provided life insurance. The first place to look is to your employed spouse’s employer. What benefits are offered that extend to spouses?
Always compare before jumping in with two feet. Independent insurance firms can offer very competitive pricing on policies that will help mitigate financial risk to your family. The risks that stay at home parents need to plan for are based on what stage of life the family is currently facing. A stay at home parent (SAHP) with two children under five, a mortgage, and an employed spouse will need very different insurance coverage than a SAHP with children on the cusp of college-age, no mortgage, and a working spouse less than ten years away from retirement.
The stay at home parent with two children under five, a mortgage, and an employed spouse is facing unique risks that insurance theoretically could help lessen. What if the SAHP were in an accident and became disabled in such a way they couldn’t care for the children or maintain the home in the same way? Disability insurance is the traditional solution here, but unfortunately, most insurers require two years of income to qualify for coverage. Thus, in this case, to mitigate the risk of the SAHP becoming disabled, the family should consider an increased emergency fund balance to act as a buffer for the unexpected.
Life insurance is a must in this scenario. The family should have a policy on the SAHP and also covering the employed spouse. The insured amount on the SAHP is a serious consideration because you must weigh the economic impact on the family, should they pass. What would the cost of full-time child care be? What would be the cost to maintain the house and complete all the tasks that fall in the SAHP’s wheelhouse?
Weighing the options
The amount of term life insurance necessary for the SAHP will be a consideration of the weight of the economic impact of unexpected death and the current debt burden of the family. Permanent life insurance is often not necessary for SAHPs because it is not as cost-efficient as term insurance. With permanent life insurance, you are paying more in annual premiums for features such as the ability to build cash value. The extra cost does not necessarily provide a corollary benefit. SAHPs should purchase an appropriate amount of term life insurance for an affordable annual premium.
Another of the many risks stay at home parents face is a limited history. Given the SAHP does not have an earned income, they may have a limited credit history. While it is not the end all be all number some would like you to believe, it is essential to give attention to building and maintaining a credit history as another buffer for the unexpected. If the employed spouse were to pass, and the SAHP decided to relocate, a mortgage would be challenging to obtain with limited credit history.
Maintain but don’t overextend
The easiest way to maintain your credit history is with responsible credit card usage, which means managing at least one line of credit, such as a credit card. Payment history is the most impactful piece of your credit score; it weighs most heavily. Paying on time, all the time is vital. Keeping your spending on credit to a minimum also helps to boost your credit score. Overall across all credit sources (home equity lines, credit cards, etc.), you should aim to keep a low ratio of utilizing credit versus your available credit. You should also look at each source of credit. If you are maxing out one card, but overall your credit utilization is low; you could still be negatively affecting your credit score.
Preparation for the future
There are specific steps and strategies stay at home parents can take to mitigate the unique risks they face financially. The first step is to identify and acknowledge those risks. Preparing for the unexpected is especially crucial for families with a stay at home parent. Just because you don’t have workplace provided benefits like a 401(k) does not exclude you from being prepared for the future. As a stay at home parent, if you would like help taking the steps and putting in place strategies to protect your family, we would be happy to have a conversation.