Financial Planning for a Homemaker
Brief Overview
We often meet with couples where one of the spouses is not working in order to care for the home and children full-time. We all know that this is one of the hardest and most important jobs in the world!
We all can agree that being a stay-at-home spouse is a job in and of itself. We also know, however, that we don’t get paid to do it! Not only does this mean we’re not receiving a paycheck to add to the household income, but we’re personally not saving. And no, I don’t only mean saving in your bank account but also for retirement!
Traditionally, women were the ones that stayed at home, but the numbers are changing according to a Pew Research study.
In 1967, 49% of women were stay-at-home moms. Today about 29% of mothers choose to remain at home which is actually a 6% increase from 1999.
Why is this important? Because being a stay-at-home mom is a large contributor to why women have less saved in retirement and have significantly lower Social Security and pension paychecks. Why? Because when you’re not working you are not contributing to Social Security, a retirement plan, and/or a pension plan.
This lack of retirement funds is problematic when a couple is trying to live in retirement. More importantly, women on average outlive men by 5 years, which means women need retirement savings more than ever!
Of course, all of this is also true of stay-at-home husbands and fathers.
Many feel as though there aren’t any retirement options for stay-at-home spouses but this is false!
Here are a few ways to ensure that you have a promising financial future while also being a stay-at-home parent.
Open an Individual Retirement Account (IRA) for yourself
So long as your spouse has earned income, they can make a deductible contribution of $6,000 / year on your behalf into an IRA ($7,000 if you’re 50 + years old) in 2019. You must file a joint tax return and the working spouse has earned income that is equal or greater than the sum of the nonworking spouse’s contribution plus the working spouse’s contribution.
Household AIG income limitations do still apply in order to receive the deduction. Even if your salary excludes you from the deduction, you can still make the contribution on behalf of the non-working spouse for tax-free growth. This way you have retirement savings in your name even though you’re working in the home.
Have your working spouse buy life insurance
In case your spouse passes away unexpectedly, be sure to have enough life insurance to not only cover funeral costs but also debt (such as a mortgage and car loans), childcare, future college expenses, and your living expenses as you most likely enter back into the workforce.
The rule of thumb is that you should take our 4-5x your annual income, but each situation should be looked at differently. Loans would increase this value, for example. Speak to a professional to understand your individual situation.
Open a non-retirement investment account
Albert Einstein once called compound interest the eighth wonder of the world. Why? Because over time it can have the potential to grow your money exponentially.
Investment accounts are able to take advantage of this if you contribute to it regularly, avoid withdrawing money, and allow it to grow for the long-term.
If you want to see an example of compound interest in action, check out our article on how to invest for retirement the right way.
Consider creating a lifetime income stream through an annuity
Retirees really enjoy pension because they can provide a sense of security. They know that each month they will receive an exact check from their previous employer regardless of what the stock market is doing. This allows for consistent planning to make ends meet in retirement.
As a non-working spouse, you do not have the option to have a pension but you should consider creating a similar lifetime income stream through an annuity.
Annuities can grow over a set period of time and then once you annuitize the contract, you can receive a monthly set income. This may help ease any fears of running out of money in retirement.
Pay Yourself First
Your job as a homemaker is extremely important and you should take steps to make sure that you’re paying yourself first. Even though you may not work a traditional job or own a business, you can still reap the rewards of retirement if you plan appropriately.
There are options for you to “pay yourself” through an IRA, a savings account, and an annuity. You are contributing to your family in a real way and so you should be compensated for it! No need to stress in retirement when there are easy steps you can take to secure your financial future.
If you’re not sure how to create a financial plan, set up an investment portfolio, or use any of the strategies that we’ve discussed here, don’t hesitate to reach out to us! A financial professional can do wonders to get you on the right track. We’re here for you, no matter how simple your question may be.
Written by Magdalena Johndrow, MSc, CFS®
Maggie is a Partner and Financial Advisor at Johndrow Wealth Management. She attended Providence College and the London School of Economics prior to beginning her career on Wall Street at Barclays and JP Morgan. She has taken her experience with high net-worth clients and used it to empower families and small businesses.
