A couple walked into my office, armed with papers and spreadsheets, and announced, “We’ve decided that one of us will give up working to stay at home with the kids.”
They had their rationale in good order and fully documented. By the time they cut out daycare fees, commuting costs, lunches out and professional clothing, they figured it was actually costing them to have two incomes. Just in case I wasn’t yet convinced that they were making a good decision, they hurried on before I could say a word: “…and then there are the income and payroll taxes we’ll save, not to mention the stress and strain on our family…”
Then came the final nail in the job coffin: “This will be much better for the kids…”
I thought carefully before responding. My job as a CFP® professional is not to impose my opinions or choices on them, but to help them evaluate their goals. That meant responding directly to their arguments, but also getting them to think about what was missing from their analysis.
To the “better for kids and family” argument, I acknowledged that they alone were the best judges of what was right. But I did share with them my belief that what’s best for parents is usually best for children. I also acknowledged that I myself had always been a working mom. They needed this information in order to properly evaluate my advice.
I eliminated the “save taxes” argument by gently pointing out that until tax rates on additional income exceed 100 percent, they’d always be better off earning more income, even if it meant higher taxes.
Then I turned to the “costs” of leaving a job. These are not hard costs paid for by check or credit card, like the costs of daycare or your commute. Rather, they are foregone benefits, many of which will be unavailable at some future date. As such, they are harder to quantify, and easier to ignore when making decisions about what to do today. Here are some to consider:
Many employees have retirement plans where their contributions are matched up to a certain amount by their employer. Giving up employment means giving up the “free, tax-deferred” benefit of the match. It’s important that stay-at-home parents still fund their retirement via IRAs or with after-tax savings, but the amounts they can put aside are often less – due to a tighter budget or IRS limitations – than what can be put in an employer plan.
Non-taxable or Pre-tax Tax Benefits
Some employers reimburse employees for tuition expenses, and these reimbursements are not considered taxable income. Clearly, if your employer has such a plan and you are considering going back to school, then factor this in as a “foregone benefit” if you decide to leave your job. Similarly, you may have a cafeteria plan at your workplace, which allows you to save for certain expenses – such as eye care or dental – with pretax dollars. These services will be more expensive if, after leaving employment, you pay for them with after-tax dollars.
Social Security Benefits
Unfortunately, staying at home to take care of children is not considered real work in this country, and therefore no credit is given to full-time parents. Be aware that retirement benefits are calculated on the highest-paid 35 years of employment. If time out of the workplace means you have less than 35 years, then some zeroes will be used in the averaging, lowering your benefits. While the ability to claim on a spouse’s income can mitigate some of this cost, the best scenario is higher expected benefits for both spouses.
Employed or not, as a parent you need certain coverages – most notably life, health, and disability. Many employers offer group term life insurance up to $50,000 at no cost to employees, so this, too, will be foregone if you leave. With respect to health insurance, it may be the case that the working partner no longer gets spousal coverage, as a result of employers dropping this feature in response to higher health care costs. Thus, overall health insurance costs may go up. Finally, there is disability insurance which is not available to those without workplace earnings. Problem is—and it can be a big one—should the at-home parent become disabled, what this parent provides to the household in terms of cooking, cleaning, childcare and transportation may need to be purchased from outside servicers.
The longer you stay out of the workplace, the harder it can be to re-enter at a later date at an income or responsibility level comparable to that of the job you left. Your skills can become quickly obsolete given the competitive pressure for businesses and organizations to keep up with lightening pace of technological innovation. It’s an unfortunate reality that the best way to get a good future job is to have a good present job. The amount of foregone future income and employment benefits can be considerable if the stay-at-home parent must take a much lower-paying job in order to reenter the labor force.
Does it sound like the deck is stacked against dropping out of the workplace?
Not necessarily, and in fact my couple went ahead with plans to have only one of them work, with my blessing. What’s important is that they made their decision with a full accounting of the costs and consequences of their choice. They made some preemptive moves, such as setting up a savings plan for the non-working spouse and reviewing their insurance coverages, to make sure they would not trade their future security for the sake of their kids. Aware now of the difficulties inherent in “career re-boarding” at a later date, the stay-at-home parent started planning how she would stay current and visible in her field through training and networking.