The Financial Transition to Stay-at-Home Parent

Jul 9, 2021

There comes a time in some parents’ lives when they decide to step away from work and raise their family. If your household is considering making this adjustment, be sure to have your financial system in place before committing to your new lifestyle.

Cash Flow Changes

The most apparent change to the household of a newly minted stay-at-home parent is the loss of income. Going from two incomes down to one might be a major shock to the system. However, often, a parent chooses to stay home to watch their child(ren), so the loss of income may have less impact when you take away daycare expenses. Review your budget well in advance of the transition and reassess your emergency fund. If you were operating with an emergency fund with three months of living expenses, it might make sense to double that amount and err on the side of caution.

Retirement Planning

Leaving the workforce doesn’t have to mean losing your ability to save for retirement. Although you will no longer contribute to a 401(k), you can make what’s called a spousal IRA contribution. Normally, you must have earned income to contribute to an IRA; however, a working spouse can make an IRA contribution on behalf of their stay-at-home counterpart. The type of contribution (Roth vs. Traditional) depends on household income for the calendar year. If you were phased out of Roth eligibility or IRA deductibility as a dual-income household, you might find yourself under the limits with a single earner.

Employee Benefits

A paycheck represents just one piece of compensation. Employee benefits make up the rest. Both disappear when you leave the workforce. This could disrupt your health insurance coverage. If you were enrolled through your employer’s plan, you have a few options:

  • Join your spouse’s plan mid-year due to your change in employment.

  • Purchase coverage on the healthcare marketplace.

  • Maintain your previous coverage through COBRA for 18 months at 100% of the cost, plus an administrative fee.

This may also mean that you lack adequate life insurance coverage. Although group life policies may be portable, sometimes it makes more sense to purchase individually owned coverage.

Conclusion

Being a stay-at-home parent is a full-time job with different types of “employee benefits.” Review the details of your household finances with your financial planner and enter your new career with confidence.

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