If you are married and considering either you or your spouse staying at home to raise your children, you should include how to financially protect the stay-at-home parent (SAHP) in your discussions.
Many couples who decide one spouse should quit their job to become a SAHP do a couple of basic things. They might calculate their budgets to decide whether they can make ends meet on one income and discuss sacrifices they might need to make for the situation to be workable.
However, some couples fail to consider potential future problems that might arise. This includes the possibility of the disability or death of one spouse or that as a last resort, a relationship may end.
While you might not want to think about these issues when you're starting your family, it's essential to have a strong contingency plan to protect the SAHP's financial interests.
Whether you're the SAHP, your spouse is, or just considering it; you need to understand that parents who quit their jobs to raise their children are financially vulnerable. SAHPs also make significant contributions to their families, which deserve acknowledgment.
Here's some information about the types of issues you'll want to consider, some financial protections to put into place, and how to discuss the topic with your spouse.
Issues to Consider
If you plan to quit your job and become a stay-at-home parent, you should consider several issues that could put you at financial risk.
Reduced Earnings Later
Exiting the workforce for several years to raise your children until they enter school or beyond may limit your marketability and reduce your income potential later. When returning to work, you might even find yourself having to accept a lower-level position at a lower pay rate than what you previously earned.
Reduced earnings may also affect the future social security benefits you're entitled to.
Disability or Death
Even if you and your spouse are young and healthy, you should consider what might happen if one of you becomes seriously ill, is severely injured, or unexpectedly passes away. If you're entirely reliant on their income and it's reduced or goes away entirely due to them becoming disabled or dying, you need to have an estate plan to protect you and your children.
Similarly, if you pass away, you should have protections for your spouse to support the value of the services you supply your family as a SAHP.
A Marriage Ending
Unfortunately, there are some marriages that dissolve even when a couple has tried everything to make their relationship work.
If, as a last resort, you find yourself facing a divorce you should understand that your finances will be split according to the laws of your state. Additionally, spousal support is at the court's discretion. Unless you have a legal prenuptial agreement, there are no guarantees on the amount you will receive or duration of support.
8 Financial Planning Steps to Protect a Stay-at-Home Parent
Living on one income can be challenging in today's world and couples should remember that the SAHP needs to have protection for their financial future.
Now that you know some of the things you should consider, here are some actions to take to financially protect your finances if a challenging situation occurs.
1. Open a Spousal Individual Retirement Account (Spousal IRA)
While the Internal Revenue Service (IRS) has a general rule that people cannot contribute more to an IRA than what they earn from work, there's an exception known as a spousal IRA. A spousal IRA is available if you file a joint tax return with your spouse.
The maximum contribution to the spousal IRA in the SAHP's name is $6,000 annually when under 50 or $7,000 for those over 50.
Traditional spousal IRAs are tax-deferred retirement accounts, so the contributions a spouse makes on behalf of the other will not be taxed until withdrawals begin in retirement. This feature allows the contributions to grow over time.
You can also select a spousal Roth IRA and make contributions after taxes have been paid. With this type of account, withdrawals in retirement will not face taxation. Having a spousal IRA can help protect a nonworking parent's ability to support themself at retirement age.
Spousal IRAs are not joint accounts. Instead, a spousal IRA is in the name of the individual. Having a spousal IRA in your name can help protect your finances in your golden years.
2. Consider Other Retirement Accounts if You Have a Side Hustle
There are other available retirement savings options for SAHPs who also run a small business or engage in a side hustle.
Self-employed people can open solo 401(k)s or simplified employment pension (SEP) IRAs, both of which allow people to contribute more than the annual limits for a traditional or Roth IRA.
For a SEP IRA, you can contribute up to 25% of your income or a maximum of $61,000 in 2022, whichever is less.
A solo 401(k) is a type of investment account that works like a regular 401(k) and allows you to contribute up to a maximum of $20,500 per year if you're under age 50 on a tax-deferred basis.
3. Make Sure You Both Have Sufficient Life Insurance
Even when there's a SAHP not earning an income, both parents should have term life insurance policies to protect you both if something happens.
The income earning spouse's life insurance policy should be in an amount that will cover your family's needs for a duration you and your spouse have determined. Consider all your family's debt, children's expenses, household bills, and others that will need to be covered if an unexpected death occurs.
The SAHP should also have a term life insurance policy with their partner as the beneficiary. While they might not earn an income when staying home caring for children, they provide significant support to the family that would need to be covered upon a death.
Consider the time you or your spouse might need to take off from work to care for children, the cost of hiring a housekeeper or childcare worker, your children's expenses, and others when figuring out the limits of a life insurance policy.
4. Make Sure All Assets Are Titled Jointly
To protect your interests in marital assets, make sure you title all of them in both of your names. This includes your house, vacation properties, investments, bank accounts, or vehicles. SAHPs are contributing family members and should be entitled to receive half of the assets in a marriage.
However, there is one exception. If you brought valuable assets into your marriage, you may consider keeping those assets titled only in your name, and avoid intermingling them. The most important thing is that you talk about these specific assets as a couple so that there are no hard feelings about why a particular decision is made regarding them.
5. Understand Your Family's Finances and Make Mutual Financial Decisions
Instead of one spouse taking care of all the couple's finances, it’s important for both people to understand their assets, debts, and overall financial circumstances.
You should always make sure you understand your family's money situation and fully take part in the financial decision-making. Making mutual decisions and talking about money goals with your spouse also helps build trust and sets the stage for a lasting relationship.
It's also crucial that you know the location of the financial (and legal) documents in your home. For electronic files, both partners need usernames and passwords to allow them access to financial information.
6. Consider a Postnuptial Agreement
You might consider creating a postnuptial agreement if you and your spouse did not sign a prenuptial agreement before marriage. A "postnup" is a legally enforceable contract and can be used to protect your financial health.
You can use a postnuptial agreement to decide how your assets and debts will be divided, if that ever becomes necessary. Another thing you can include is an agreement for spousal support in some situations.
A postnuptial agreement can also be used to document that the decision about a parent staying at home was made jointly to help show the value of contributions made by the nonworking spouse.
Because a postnuptial agreement is a legal contract, it must be drafted correctly. If it includes provisions that violate the law, the court might disregard it altogether.
Because of the importance of ensuring a postnuptial agreement follows your state's requirements, you and your spouse should have representation from separate attorneys to negotiate provisions and ensure fairness.
7. Keep Your Work Skills Current
While staying at home, it's essential to keep skills up to date to increase the ability to re-enter the workforce at a similar level to when a job was left.
Some of the ways to maintain knowledge and skills include the following:
- Working part-time in career field
- Maintaining professional license
- Attending continuing education courses
- Reading the latest research, trends, and news in career field
- Attending professional conferences
- Working as a freelance consultant
- Engaging in networking activities with former coworkers and employers
- Starting a home-based business
8. Open At Least One Credit Card Account in the SAHP's Name
If you combined finances as a couple, you might have decided to open a credit card and name one spouse as an authorized user on the other's account. But it's a mistake to leave one parent without a credit card account in their name.
Like their working partner, SAHPs should have access to their own credit cards, monitor their personal credit scores, and regularly review their credit reports.
Reviewing your credit card accounts, credit scores, and reports can be done together, but each spouse should be in control of their personal credit history.
How to Talk to Your Spouse About Financial Protections
While you might understand the need to take steps to protect yourself as a stay-at-home parent, knowing how to bring the topic up with your spouse might be difficult. There are ways to discuss your needs with your spouse without fighting, however.
Start by telling your spouse that you need to discuss your finances and your need for protection in case something happens to either of you.
Plan the conversation for a day and time when your children won't be present, and letting your spouse know in advance can allow both of you time to prepare.
Be sure to keep an open mind during your talk. Keep eye contact and remain calm. Show mutual respect and listen when they talk. Explain what you want in simple, direct terms and explain why you think it's crucial to ensure you'll be protected.
Create a financial plan you both agree to, and work with attorneys if necessary. Finally, schedule regular times to meet and talk about your finances so you can ensure all financial decisions are mutual.
Talking to your spouse about your need for financial protection when staying home to parent the kids might not be easy. Still, you need to consider the worst-case scenarios and plan accordingly. Taking proper steps to prepare for contingencies helps ensure financial security if something goes wrong.
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