While it's common these days for both adults in a family to be working, the stay-at-home parent is in no danger of becoming extinct.
Indeed, some 5 million mothers stayed at home in 2010, according to the U.S. Census Bureau. And the number of fathers manning the home front while their wives worked was about 176,000, nearly triple the total in 1995, when the bureau first starting tracking stay-at-home dads. The jump was attributed in large part to the financial crisis and resulting recession, as many laid-off men either could not find work or chose to remain home to save money on child-care costs.
Most planners routinely counsel couples on the special needs of one-income households. They advise parents who are thinking of quitting work to plan ahead and establish a credit history and a retirement plan while they can. Planners also recommend that one-income families buy life and disability insurance for both parents and fund separate retirement accounts for both, as well. And they advise them to be prepared for the reality of living within the limits of a tighter budget.
Laura West, a planner at West Financial Advisors in Nevada, Iowa, says she recommends that couples contemplating a stay-at-home arrangement first practice living as if they had only one income for at least three months before one of them quits a full-time job. They may find that even though their expenses will be cut for needs such as day care, transportation and clothing, they may find it hard to continue to dine out frequently or splurge in other ways. Such couples should also bolster an emergency fund to cover unexpected household repairs.
For couples having their first baby, one common misconception is the need to upgrade to a larger living space, West says. "I suggest they stay in their apartment or buy a condo, then buy a bigger house when the kids get older, when they really need more room."
Heidi Clute, a planner and owner of Clute Wealth Management in Plattsburgh, N.Y., adds that couples should make sure that credit cards, mortgages, auto loans and other debt are in both names so that the nonworking spouse can maintain a credit history. "If not, the spouse will have zero to very little credit history," Clute says. "Someone could find themself at 60 with no credit."
Ideally, stay-at-home parents should establish credit and apply for credit cards before they quit work, both of the planners say.
In fact, one of the rules that came out of the 2009 federal Credit Card Act makes it harder for nonworking spouses to gain approval for credit cards. The Federal Reserve now requires credit card issuers to consider individual income from applicants instead of household income.
Couples should buy life insurance on both partners, not just on the working spouse, says Judy Hagar, a CFP and partner at Wolters Hagar & Pratt Financial Planning in San Diego. If the stay-at-home parent dies, the surviving spouse can use the benefits to pay for outside child care, live-in nannies, housekeepers and other functions that had formerly been handled by the stay-at-home parent.
Parents who are still working and thinking of quitting to raise children should consider buying an individual disability insurance policy that is portable so they can continue to have coverage when they are not working.
"If you don't get this and just have the disability policy from your previous employer, the disability company can deny your claim if you haven't been working there for three or four years," Hagar says. "The biggest outlay ever can be when a young person becomes disabled - say, in a car accident or a sporting accident. For the rest of their life, they might be paying medical bills ore nursing home care."
Hagar also recommends that stay-at-home parents be sure to keep their Social Security accounts active. When a spouse dies, the survivor can collect only 50% of the partner's benefits. If he or she divorces and remarries, that person would lose the ability to draw benefits from their ex-spouse altogether.
If the stay-at-home parent or both parents operate a home-based business, both should be listed on IRS Schedule C and all related business documents when they file taxes, Hagar says. Some of her clients listed only the information of the spouse who actually filed the taxes, in effect denying the other spouse from accumulating Social Security benefits.
If the couple has a business and there are no other employees, they can obtain a so-called Single(k), Hagar says. Each can contribute the maximum amount into a separate 401(k) account. For example, the spouse who owns the business can pay the other spouse $17,000 ($22,500 for those age 50 or older) and that entire amount can go into that person's 401(k) account. The owner also pays the spouse's Social Security taxes. The owner can also put $17,000 (or the higher amount for those older than 50) into his or her own 401(k) account.
All stay-at-home parents should have their own retirement accounts, says Nancy Anderson, a CFP with Financial Finesse in Park City, Utah. Many pension plan benefits are reduced when a spouse's full benefit is included, or will only pay the surviving spouse 50% of their deceased spouse's benefits, so it's important to have a backup plan, she says.
If the stay-at-home parent has no earned income, the working parent can still fund a spousal IRA for him or her, by opening a Roth or traditional IRA - if he or she qualifies - or adding to an existing one, Anderson says.
Likewise, if a stay-at-home parent had a 401(k) with a former employer, he or she can roll over the funds into an IRA upon leaving work, Anderson says.
Stay-at-home parents should also make sure they are well on their way to funding their own retirement before paying for a child's college education, she says. She adds that couples in these situations should consider having their children take out student loans.
"The best thing you can do for your kids is to take care of yourself first, because they have 40 years to pay those loans back at favorable interest rates," Anderson says.
As of July 1, the interest rate on federally guaranteed student loans is 6.8%, according to Federal Student Aid's Direct Loans website.
GETTING ON THE SAME PAGE
Once couples have established one-income households, it's important to keep debt at a minimum - and for both parents to be aware of expenditures, the planners say.
This is really an issue for military families, says Hagar, who counsels such couples through both Operation Homefront and Wounded Warriors Family Support, as part of the pro bono arm of the San Diego chapter of the Financial Planning Association.
"The more egregious situations are when one spouse is deployed and the other spouse is running up credit card debt," she says. "When the military spouse comes home, they are livid because all of their extra combat pay is gone."
Both parents should be involved in all financial decision-making, which includes attending meetings together with their financial planner, Clute says, and planners should make sure the comments and concerns of both are addressed.
"Usually one spouse or the other will tend to be more vocal," she says. "I think it's our role as advisors to try to encourage active participation from both, because if you don't hear from both, how do you know you are planning for both?"
This can be especially crucial for couples in which each partner has a very different level of risk tolerance, Clute says. If the more financially aggressive spouse is the only one making decisions, the more conservative spouse may be in for quite a shock if the mate dies first and leaves a less-than-adequate financial situation. "If I'm not planning for the surviving spouse, that client will go to a planner who will listen and support them, Clute says.
Anderson says she will never forget the look of horror on the face of a stay-at-home mother when Anderson explained why the brokerage account owned by her and her husband - but controlled by him - had sunk in value to $50,000 from $300,000 in less than a year.
The woman had no idea that her husband had invested heavily in micro-cap tech stocks - on margin, no less, Anderson says. When the dot-com bubble burst in 2000, the value of their portfolio was decimated to an amount below the sum borrowed from the brokerage firm, the loan was called and the brokerage sold the distressed stocks to make up the difference.
After attending one of Anderson's financial planning workshops for women, the wife showed Anderson two brokerage account statements - one for year-end 1999 and the other for the second quarter of 2000, which included the plunge in value. When Anderson explained the margin call on the distressed portfolio, the wife's face "just turned white," she says.
"While she was very mad at her husband, it was really her responsibility to also be involved in the decision-making," Anderson says. "He was a professional and she had just assumed he knew what he was doing, but no one should ever put those decisions in anyone else's hands."
Katie Kuehner-Hebert is a freelance writer in Running Springs, Calif. She has contributed to American Banker, Risk & Insurance and Human Resource Executive.