Yahoo Finance Crucial Money Moves Stay-at-Home Parents Should Make
When parents opt out of the workforce to take care of their children, they forgo income and often stop saving for retirement, too. That decision can put them at risk as an older adult, but there are steps nonworking parents can take to increase their financial security.
A report released by the Transamerica Center for Retirement Studies last month titled "Homemakers Are Not Off the Hook" found that among 1,600 stay-at-home parents and family caregivers surveyed globally, most said they planned to rely on the income of their spouse or partner during retirement. Fewer than half said they were currently saving for retirement, and around half said they lacked any kind of retirement strategy.
"Homemakers have an extraordinary job with long hours and difficult decisions, yet it's a job that comes without pay... Few feel personally responsible for ensuring they have enough income in retirement, and many expect to rely on a spouse," says Catherine Collinson, president of the center. Given life's many uncertainties, which include divorce, job layoffs and death, depending on a spouse's income carries big risks, she adds.
Stay-at-home parents' Social Security income can also be lower in retirement, since payments are based on workers' 35 highest-earning years. "The sleeper issue people don't know about is that while you're not working, you're not earning Social Security credits," says Kathy Stokes, a senior fellow for WISER, a nonprofit dedicated to women's financial security. Lower monthly payments make saving before retirement even more important.
Just because stay-at-home parents aren't earning money doesn't mean they can't actively manage their finances. Here are strategies that can increase financial security now and in retirement years:
Get familiar with your family's finances. Collinson suggests taking a close look at everything from day-to-day budgeting to savings and investments. "Start a conversation, including short- and long-term goal setting," she says. That discussion can help guide your saving and spending choices.
Educate yourself. If you're not yet familiar with investing basics, then Collinson suggests reading books or taking an online course. "Get financially savvy," she urges, adding that parents can then use their new skills to pass on key financial lessons to their children. "It's a skillset that will serve them well for the rest of their lives."
Contribute to a spousal IRA. As long as you file a joint tax return with a spouse who earned taxable income, then you can contribute up to $5,500 a year ($6,500 for those age 50 or older) to a spousal IRA account. Thanks to the power of compounding, even contributing $5,500 a year over 30 years with 5 percent interest can add up to over $350,000.
Save more in nonretirement accounts, too. If you're already maxing out your tax-advantaged retirement accounts, then you can also put money into a regular savings account and earmark it for retirement. "If you have the capacity to save more, do automatic contributions and earmark it for retirement. You don't get the tax benefits of a 401(k), but at least you're saving," Stokes says.
Have your own credit card. In addition to saving, Cary Carbonaro, financial planner and author of "The Money Queen's Guide: For Women Who Want to Build Wealth and Banish Fear," says it's important to build your own credit history, too. That way, you can take out loans in your name if you want to. She says stay-at-home parents should always have a credit card in their name for that purpose.
Start saving for college early. A NerdWallet survey of over 1,200 moms released earlier this year found that almost 44 percent of mothers with teenagers said they wished they started saving for their child's college education as soon as their child was born. "The perception is that college and retirement savings are so far off, and there's a lot of costs related to child raising that seem to take precedent, but we found that parents wished they started saving earlier," says Farnoosh Torabi, financial editor for NerdWallet and author of "When She Makes More." "Even if you're just putting away $100 a month, every little bit helps, especially with compound interest."
Put retirement before college savings. Even though saving for college is important, you don't want to put it before your retirement savings. "Put retirement first, because for college, [students] can get loans and grants," Carbonaro advises. Before funneling money into a 529 college savings account, she suggests shoring up your retirement savings plans.
Check up on your partner's retirement savings. If you're relying on your spouse's retirement funds, then you'll want to double check they're sound. "Understand how they work if it's a traditional pension plan or how long your spouse needs to work to vest in the plan. Encourage your spouse to max out their 401(k); they're saving for two," Stokes says.
Look beyond the loss of current earnings. When parents are calculating whether they can afford to stay home, Stokes suggests considering not only the loss of current income, but also future income. Even if you'll no longer have child care expenses or commuting costs, the short-term savings might not outweigh your long-term needs. "A lot of people think, 'My paycheck would barely cover the child care,' but they're not looking at the longer-term picture... Taking a lot of time off can have a dramatic impact on your retirement security," she says, as well as future earning potential.
Work part time. Collinson urges parents staying home to consider working part time or pursuing an entrepreneurial side business while outside the traditional workforce. "You'll not only earn income, but if the unthinkable happens and you need to get a job, it's a lot easier to find one if you have a steady work history," she says. "Working part time can be a really effective risk mitigation strategy."
Stay connected. When you're taking time off, Torabi suggests staying in touch with co-workers. "For [people] who choose to take time off work, it's important to stay active in professional organizations, communicate with co-workers, go to workshops, update your LinkedIn profile and stay abreast of the industry," she says. "They're not money-making steps, but they put you in a better position," she says, if you decide to eventually look for paying work.
More From US News & World Report
