By Shannon P. McNulty, Law Offices of Shannon P. McNulty
When parents have young children, it can be difficult for both of them to continue their previous full-time work routines. The demands of parenthood are immense, and having one parent stay home with the kids – at least during their younger years – can be an attractive option for a family.
Unfortunately, the all-encompassing, 24/7 job of a stay-at-home parent comes with no paycheck, no retirement plan and financial risks for the entire family. When taking the leap to leave the workforce and stay home with their kids, it is important that stay-at-home parents take extra measures to protect both themselves and their family. Knowing the risks and challenges involved and taking steps to address them can make the decision to stay at home better for everyone involved.
1. Know What Is at Stake. Taking time off to be a full-time caregiver is one of the most significant financial decisions a parent will ever make, but it is often far more costly than anticipated. In many cases, parents calculate the cost by multiplying their current salary by the number of years they expect to be out of the workforce and then subtracting the amount that they will save on childcare. Because childcare costs can eat up a large chunk of a family’s income, it can appear that staying home is a financially smart choice – or at least a low-cost one.
This simple calculation can be deceiving because it fails to account for lost salary increases that add up over time or for missing contributions to a retirement plan. Taking time off – especially in one’s 20s and 30s – can have a permanent effect on the trajectory of a career and earning power, easily costing upward of $500,000 over time. Studies show that professional women lose an average of 18% of their former earning power when they take three or more years off, and that percentage increases with every year spent out of the workforce. In certain sectors, such as business, that percentage rises to nearly 40%.1
When stay-at-home parents try to return to the workforce, it is often more difficult than they might have anticipated. Over 70% of professional women seeking to rejoin the workforce after taking time off are unable to find a job comparable to their former position. Just 40% manage to return to full-time, professional work.2
None of this means that being a full-time caregiver has to end in financial difficulty, but it does mean there are risks and consequences that need to be factored into any decision to take time off from a career. Parents should be realistic about the financial and professional trade-offs. Understanding those trade-offs ahead of time and addressing them head on can leave stay-at-home parents more confident in their decision and less likely to have regrets later.
2. Be Sure Both Spouses Are on the Same Page. Having one parent stay home affects both spouses – not just the stay-at-home spouse. It is important to make sure that the spouse who will continue working is fully supportive of the arrangement and respects the demands of the stay-at-home parent’s job. No one wants to end up in a situation where the working spouse is resentful or feels that he or she has the short end of the stick.
3. Discuss How Income Will Be Managed. While stay-at-home parents do not get a paycheck for taking care of their kids, this should not mean they have no money. Couples should discuss how the working spouse’s paycheck will be managed. Will it be deposited into his or her individual account or into a joint account? If it goes into an individual account, how will the funds be shared? A stay-at-home parent should have access to funds not just for family expenses, but for personal needs as well.
One of the biggest challenges for stay-at-home parents can be feeling that the money earned by their spouse is not actually theirs. As a result, they can fall into a trap of neglecting their own needs. Stay-at-home parenting is perhaps the only job where one is on call 24 hours a day, 365 days a year with no vacation days or sick days. It is important that stay-at-home parents take care of themselves in order to prevent burnout. This may mean hiring a babysitter and taking the day off to spend time with friends or just to have some time alone.
Note that, if one or both spouses are not U.S. citizens, transferring money from one spouse to the other or into a joint account can have gift tax consequences. Couples in this situation should consult a lawyer with estate tax expertise to come up with a tax-friendly arrangement.
4. Protect Yourself in Case of Divorce. One of the biggest risks stay-at-home parents face is the possibility of divorce. Divorce is hard for anyone, but it can pose unexpected financial challenges for stay-at-home parents who have not taken adequate measures to protect themselves.
Courts generally provide some protection for stay-at-home parents in the form of alimony (also known as maintenance), but such payments are increasingly rare, as courts now expect both parents to financially contribute to the family. Even if alimony is awarded, it may not be sufficient to support the parent’s previous lifestyle.
If a couple has entered into a pre- or post-nuptial agreement, the stay-at-home parent may have completely waived the right to alimony. In this case – unless the working spouse is willing to renegotiate the agreement – leaving a job is highly risky. In most states, these agreements are enforceable, and a parent who has been out of the workforce for several years could end up with no assets and no income.
The only sure way for stay-at-home parents to be protected financially in case of divorce is to enter into a pre- or post-nuptial agreement with their spouse, preferably before leaving their job. While talking about divorce is never easy, it is essential for parents planning to leave the workforce to confront the possibility and to put measures in place to protect themselves. The working spouse should appreciate the importance of having these protections in place.
An enforceable marital agreement generally requires both spouses to have their own lawyers. This does not mean that the process has to be contentious; it simply ensures that both spouses know their rights and what they are agreeing to. The couple may benefit from sitting down with a financial advisor – either together or separately – to come up with a contingency plan for their financial situation in the event of divorce. This plan would then be incorporated into the marital agreement. The agreement should also include provisions for how those payments would continue to be made if the working spouse were to pass away.
5. Protect Against Loss of the Working Spouse’s Income. There is a risk of death or disability in any family, but when only one spouse works, the loss of his or her income can be particularly devastating. Certain measures can help protect the family in the event that the working spouse dies or becomes disabled.
Life insurance and up-to-date estate documents can protect the family in the event of the working spouse’s death. The family should have sufficient life insurance on the working spouse’s life not only to support the family until the children are grown, but also to provide for the stay-at-home spouse’s retirement. Provisions for the surviving spouse in the event of the working spouse’s death also should be formalized in legal documents, such as a will or trust, as well as in a separate marital agreement.
Without a will or a marital agreement, there is no guarantee that the surviving spouse would be adequately provided for if the working spouse dies prematurely. In some states, like New York, the assets would be divided between the surviving spouse and the children. If the children are minors, a court – not the surviving parent – would be charged with overseeing the assets until the kids turn 18, at which time they would be granted unrestricted access to the funds. A properly drafted will can prevent this from happening. Ideally, the will provisions should be incorporated into the prenuptial agreement so that the nonworking spouse is protected even if a will is not in place, if it is held to be invalid, or if the working spouse decides to change it.
A serious disability can also result in the loss of a working parent’s income, and this is far more likely to occur than a premature death. Again, where a family relies only on one income, the loss of this income can be particularly difficult. A good long-term disability insurance policy can prevent the financial devastation that can result if the working spouse develops a disability.
6. Protect Investment in a Career. One of the best ways to mitigate the financial risks of leaving the workforce is keeping up credentials and professional networks. The work environment is changing faster than ever before, and it is easy for marketable skills to go stale in just a few years. Staying active in professional organizations, taking continuing education courses and perhaps taking on some consulting work can keep skills relevant and connections fresh. It may be difficult for stay-at-home parents to squeeze in these activities, but they are incredibly important to maintaining an individual’s earning power.
7. Be Proactive. It is always easy to assume the best-case scenario, but a failure to plan can leave a family unprepared if things do not go as expected. While a decision to stay home will affect the entire family, it has specific risks for the stay-at-home parent. This parent should not shy away from raising sensitive issues and should insist on whatever support and resources he or she needs to feel comfortable in making the decision. For example, retaining a family law attorney and a financial advisor to help devise a plan for contingencies like divorce or the death or disability of the working spouse can go a long way toward making a parent considering becoming a full-time caregiver to feel more comfortable in that decision; it can also help to financially protect the entire family. A therapist or coach who has worked with parents in this situation can also be helpful. In the long run, a well-informed, carefully considered decision will pay off for the whole family.
The decision to take time off from work is highly personal. Spending more time with children can be rewarding in a way that cannot be measured in dollar signs. On the other hand, children need parents who are financially secure, and sometimes that means that both parents continue working full time. While there is no perfect answer, being educated about the options and putting protective measures in place can help both parents to arrive at the best solution for the entire family.
Shannon P. McNulty, Esq., CFP®, has a boutique estate planning practice in New York City. McNulty earned her J.D. from Georgetown University Law Center and an LL.M. in taxation from New York University School of Law. She is the author of the book “The Complete Guide to Legal Planning for New York Parents.” You can learn more about McNulty at www.mcnulty-law.com.
The views expressed are those of the author and may or may not be consistent with the views of Brown Brothers Harriman & Co. and are intended for informational purposes only. This material should not be construed as investment, legal or tax advice, nor should it be considered information sufficient upon which to base an investment decision. BBH is not affiliated with McNulty.