Not long ago we wrote a blog about how the number of stay-at-home moms in America is on the rise. As a matter fact, in 2012 nearly 30% of all US mothers stayed home to raise their kids, up 23% from 1999. Take a trip to any park on most weekdays and you’ll even see dads there also, having swapped their desk chair for a high chair.
Of course some of these parents are at home because of the lack of jobs but many are there by choice, saying that there’s no way to put a price on time spent with children before they grow up. While that might be true, it’s also true that anyone considering staying home to raise their children should look at the costs involved in swapping out a career in the working world for a career taking care of the kids.
The simple fact is that any retirement nest egg can be quite devastated by a lapse in retirement savings. For example, 50% of a 25-year-old’s retirement income can be replaced if they’re earning $40,000 a year and start saving 13% of their salary at the age of 25, including any employer matching that they can get their hands on.
If you deduct three years from that however, that 50% replacement rate falls to 43% and, after five years, it falls even further to 39%. That extrapolates to needing to save 15% of your salary if you miss three years in the working world or 17% after missing five.
Financial experts will tell you that, even if you decide to take time off, you should still continue to put savings into a spousal IRA. Yes, this will need to be funded by the working spouse but, since it’s in the non-working partner’s name, it should be fine. If you’re married and file a joint return you can also open a traditional or Roth IRA. In some cases the lower income that you have because you’re not working will make you eligible for a Roth and you may want to consider converting a traditional IRA into a Roth as well.
Taking time to raise the kids will also impact your Social Security benefits once retirement comes. The 40 credits that you need usually require at least 10 years of paying into Social Security and, if you’re close, you might consider working a bit longer. Also keep in mind that the 35 years when you earned the most money are what the Social Security Administration considers when they figure benefits, so any years that you earned nothing will cost you. If you’re a stay-at-home parent and you don’t qualify for benefits, you may be entitled to up to 50% of the benefits that your working spouse will receive.
Since it’s highly unlikely that anyone will take over raising your kids for free, having adequate life insurance on the stay-at-home parent is a must. The breadwinner in the family should have adequate life and disability insurance as well.
Finally, in any situation where one spouse ops to stay home and raise the kids, budgeting and downscaling is absolutely necessary. Putting together a bigger emergency fund is also vitally important, especially if the breadwinner suddenly becomes unemployed and unable to work.
A good suggestion is to try living on only one income before deciding to take the stay-at-home plunge. That information should help to make the decision much easier whether pro or con.