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When the controversy hit last week of whether a stay-at-home mom “hasn’t worked a day in her life” or “hasn’t had a day off in her life,” the whole issue of choosing the career of “parenthood” over “working professional” reared its head. When I was a young mother with two little boys under the age of two, I never considered being a stay-at-home mom – not because I didn’t want to. The fact is I was worried. Being a financial planner who inherently focused on long-term planning, I knew we’d be fine in the short term, but I wasn’t so sure about sustaining a one income family in the long term.
I’ve experienced first-hand the heart wrenching decision-making process of whether to return to work or not. Subsequently, in my financial planning and financial education career, I’ve always been sensitive to the unique needs of the stay-at-home parent whether that is the mom or the dad. With my first child, I went back to work six weeks after he was born (which was insane by the way). So with my second one, I took longer. I planned on going back to work full-time after four months, but the day I went to drop him off with his sitter, I literally sat down in their rocking chair and cried my eyes out. The other moms gave me knowing looks. I called my boss to let him know I wouldn’t be in that day and went home with my little one (actually both little ones) and regrouped. I had obviously not mentally prepared myself well enough. With an understanding and flexible employer, I was fortunate enough to be able to adjust my plans to work part-time for a couple of years giving me the best of both worlds – keeping my feet in the workforce and enjoying those important early years of my sons' lives.
Stay-at-home moms don’t have one foot in the workforce giving them a back-up plan; they choose one path over the other, leaving them especially vulnerable. Because of this, they have some unique considerations in their financial planning outlook. They never build a retirement plan, they may never get full Social Security benefits, college funding may be impossible, disability or premature death of either spouse can have even more serious consequences for the family than in families where both spouses work outside of the home.
Here are five special financial considerations for stay-at-home parents:
Obtain life insurance on the stay-at-home parent. Insurance agents normally gravitate to the working spouse when considering life insurance for replacement of income and rightly so, because if that income disappears, the family has no income at all. There is someone else to consider, however, because the spouse at home does provide an economic benefit. If the stay-at-home spouse passes away, the cost to replace what they do on a daily basis could be astronomical. Have you priced out housekeeping lately? I recently priced a bi-weekly housecleaning service and it was over $300 a month! I was shocked and just couldn’t justify the cost so my husband and I clean together, but a single working parent may not have the time to do it themselves or the resources to pay for it. Day care, especially for infants, can be very expensive with the average cost per year per child at over $11,000 per year. Add up the cost of replacing all of the stay-at-home parent’s “job duties” and the number of years the children would be in the household to determine a minimum life insurance amount and cover the stay-at-home spouse.
Supplement term with permanent insurance. The case for term insurance is that it is inexpensive when you are younger and need it most. As you get older, the premiums are more expensive, but eventually you won’t need it so you can simply drop it when the kids move out or when you have enough built up in investments. A stay-at-home spouse may not ever want to drop it though. They may need it for an additional income stream in retirement if their spouse passes away at any age. Depending on the age of a widow or widower and if they care for children under age 16, Social Security benefits may not add up to the full amount of their spouse’s benefit. Company benefits may follow suit, with survivor benefits often paying 50% of the spouse’s benefit. It may be too late to purchase term insurance at retirement, with premiums being extraordinarily high to renew or obtain new coverage for a 60 or 65 year old even if they are healthy. In contrast, a permanent life insurance policy obtained early in life is designed to be paid up in later years so it never has to be cancelled and will always provide a benefit.
Check the “occupation” definition on the working spouse’s disability insurance policy. There is a one in four chance a 20 year old will be disabled before they retire and currently 12% of the total population in the U.S., about 36 million people, are classified as disabled. Many professionals have group disability policies through their employer, but they may not be adequate for a long-term disability. It depends on how the policy defines disability. The best definition is “own occupation” – the policy will pay benefits if you are unable to perform the duties of your current occupation. A policy with “reasonable occupation” will pay if you cannot perform the duties of a position you are “reasonably” qualified for. You can see the grey area surrounding the “reasonable” occupation. What is reasonable? The insurance company is going to determine that.
The definition you want to avoid at all costs is “any occupation.” Check your group policy to determine how benefits would be paid and if it isn’t adequate, consider purchasing a comprehensive individual disability policy with the strongest definition of disability --“own occupation,” a residual benefit that allows the working spouse to return to their full time job gradually after a disability, and the longest benefit period possible (until age 65) in case of permanent disability.
Put college funding on the back burner. I can’t tell you how many parents call our financial coaching line to discuss college funding for the children before they are even born! I’ll hear, “oh the baby is due in three months.” Parents are wired to put their children first. Financial planners say the best way to take care of our children is to take care of ourselves first. In terms of college funding in one income families, it is even more important. Retirement comes first – college funding second. The good news is that the financial aid formula for grants and loans takes income as well as the number of children in a household into account so there may be funds available to help fund college expenses. There aren’t, however, grants and loans available for retirement. Use this retirement estimator calculator to determine if you are on track to retire, and only then start funding college savings accounts for children.
Make joint decisions on investments. Just because your spouse is a good attorney, administrator, or whatever the occupation, doesn’t mean they make good decisions in terms of managing investments. I’ll never forget the shocked look on the face of a woman who’d attended a retirement workshop I presented when she asked me afterwards to review her investment statements. Janice (*not her real name) put two statements in front of me and the current one showed a balance of $50,000 and a prior balance of over $300,000. Looking at the prior statement, I could see a list of high risk stocks in a margin account. When the market dropped and the stocks lost value, the margin was called and stocks needed to be sold at a loss to cover it. The values plummeted and so did her hopes of retiring at a reasonable age.
I turned the statements around and gave an explanation. Realization swept over her face as she sat there expressionless. She said that he’d promised not to invest aggressively. In her case, it was too late. We could easily point the finger at her husband but if she’d taken an active role in her family’s investments, understanding what they were investing in, reviewing their statements, and making joint investment decisions, this could have been prevented. The stay-at-home parent is more vulnerable than a working parent to investment losses so make sure investments fall within your correct risk tolerance (click here for a risk tolerance profile and sample asset allocation).
Families who choose to have one parent stay out of the workforce to raise their children have similar financial challenges as any other family, but they also have unique vulnerabilities. Without a back-up plan to protect their income stream with insurance as well as careful attention to retirement, investing, and college planning, there is a gaping hole in their financial plan.
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Nancy L. Anderson, CFP® is Think Tank Director and Resident Financial Planner at Financial Finesse, the leading provider of unbiased financial education for employers nationwide, delivered by on-staff CERTIFIED FINANCIAL PLANNER™ professionals. For additional financial tips and insights, follow Financial Finesse on Twitter and become a fan on Facebook.
