Do you have a stay at home spouse? Maybe your family is considering making the switch? The decision to have a stay at home spouse or to become one is not always easy. There are lots of mental and emotional considerations to make. You also need to understand the unique finances of stay at home spouses.
Here are the 5 things every stay at home spouse needs to do to protect themselves financially:
1. Save for Retirement
Most retirement accounts are tied to a job. The only tax-advantaged retirement account available to stay at home spouses is the spousal Roth IRA. This is simply the stay at home spouse opening up a Roth IRA without needing to prove earned income. For this to work, the working spouse needs to have enough income to fund both Roth IRAs. Of course, many stay at home spouses often have part-time jobs or a side hustles. This opens up other opportunities for them. Whether they make a significant income from it or not, this will give them the ability to open and fund a solo 401(k).
2. Get Life Insurance
You may have read that life insurance is only necessary for income replacement. Therefore, conventional wisdom sometimes states that someone who does not bring in an income does not need life insurance. This could not be farther from the truth for a stay at home spouse. The stay at home spouse may not get a paycheck to stay home, but they are performing a job. In fact, they are performing many jobs. Consider this: In the event of their death, the working spouse, now widowed, will need to pay for high-quality childcare, maintain the household responsibilities, and perform the additional mental load of maintaining all logistics. And let’s be honest. I doubt the working spouse will want to return to work immediately after a tragedy. The surviving family may also require support in the form of therapy as well. Obviously, when you consider this perspective, life insurance is a no brainer. The stay at home spouse needs enough term life insurance to cover the cost of the above situation. Additionally, life insurance can also give the surviving spouse more choice. For instance, the spouse who worked full time outside the home might want the ability to go part-time since now there is one less spouse to help with the family. A.L, a physician and mother, said:
My late husband got term life insurance early as a resident. We got an amount that was supposed to get me through the rest of med school and residency. Now, it will be college funds for my 3 kids. I feel SO lucky we had it in place when he was diagnosed (and ultimately passed) with his brain tumor.
3. Get It In Writing
The biggest financial risk of being a stay at home parent is divorce. As a result, the decision to have one partner become a stay at home parent must be a mutual decision. Often, couples are already married when they come to this decision. It is important for the stay at home spouse to have protection against divorce. Being out of the workforce for years poses a real financial risk. For some fields, leaving is career suicide. He or she is sacrificing peak earnings potential and forgoing career advancement. They are also giving up building up Social Security savings and retirement contributions. A postnuptial agreement is a must for couples who choose to have a stay at home spouse to protect that spouse. And yes, that will probably mean an alimony provision. To better understand what exactly a working partner is sacrificing by staying home, the Center for American Progress put together this calculator that can help these conversations focus on numbers, rather than emotions.
4. Understand Disability Insurance
Most people have disability insurance tied to their employer. Additionally, most doctors should have private own occupation disability insurance. Stay at home spouses cannot purchase disability insurance unless they have earned income such as a home business. (Note: A quick google search finds one company offering such a policy, but it seems rare otherwise). But, if they had a private policy before staying at home, they can keep it. Also, once a spouse is out of the workforce for 10 years, he or she may not be eligible for Social Security disability insurance. This is another reason why a postnuptial agreement is a must for stay at home spouses.
5. Hone Skills & Consider Part-Time Work
Another important thing to remember with the finances of stay at home spouses is that the situation can change over time. As the kids get older and spend more time in school and activities, the stay at home parent will have more time to pursue outside interests. Those interests might be a hobby, a part-time job, or a side hustle. This is a great way for the stay at home parent to flex their brain in new ways and maybe even bring home some income. Remember if your stay at home partner does decide to monetize their side hustle, they have the option of opening that solo 401(k).
Final Thoughts on Finances of Stay at Home Spouses
We often talk about financial protection in terms of paychecks. But what do you do when your job doesn't come with a paycheck? Stay at home spouses perform vital roles for their families, which is why it is so important to give special consideration to their finances. Making these five considerations will keep your stay at home spouse protected financially. Do you have tips to share about stay at home spouses?