What Does Stay-at-Home Parenting Cost You?

By Michael Liersch

Staying HomeMost working parents can relate to the desire to be with their children at every milestone. On the other hand, careers often provide satisfaction and a dual income that is important to the family. Mothers and, to an increasing degree, fathers must consider whether or not to stay at home with their children—a choice that can be difficult and very personal.

One of the most immediate and pressing concerns in making the stay-at-home parenting decision is whether the family can afford to live on just one income. However, there are longer-term factors to consider. How would a career break affect the family’s long-term financial security? What about the ability to save for the children’s education—or parents’ retirement? Will the parent taking a break lose career momentum?

The reality is that there are pros, cons and tradeoffs in every situation, but there are ways to alleviate some of the stressors and prepare.

  • Will taking time off to stay home hurt my earning power later? Seventy-three percent of women seeking to resume their careers after spending several years at home had trouble finding a comparable job, according to a study conducted by the Center for Talent Innovation in 2010. The study found those who were hired lost 16 percent of their earning power. Both men and women should consider what the job market will look like when they are ready to return to work. The good news is that more and more employers are creating programs to smooth the return to work for stay-at-home parents. It also helps to continue networking and potentially even doing some work from home so that you have a foot in the door when you’re ready to return.
  • Are there any financial advantages to having one parent at home? Short answer is yes. You’ll save on commuting costs, and your clothing budget will probably go down. The huge advantage is that you won’t be on the hook for childcare expenses. In 2012 the average annual cost of having an infant in center-based care exceeded annual tuition and fees at a four-year public college in 31 states and the District of Columbia, according to the advocacy group Child Care Aware of America.
  • Could my career break affect our retirement savings plans? If you’re not able to contribute to a 401(k) or an IRA, your spouse should consider maximizing his or her contributions if possible, to save for both of you. Once you each turns 50, you can take advantage of a catch-up provision that allows you to contribute greater amounts to your 401(k)s or IRAs. Your spouse can also contribute to a spousal IRA for you. Note: if you do some work while at home, you may be entitled to contribute to a SEP IRA for small-business owners.
  • What about Social Security? Will my benefits be reduced if I don’t work for a few years? Social Security benefits are calculated based on your 35 highest earning years, so leaving the workforce for a few years will have a limited impact on your benefits. You could potentially feel some impact if you lose earning power on your return to work and don’t catch up over time.
  • With only one income, can we still save for our kids’ college education? Yes, in most cases, you can catch up when you go back to work. Keep in mind that college should be a second priority after saving for retirement, because your child can get help paying for school, but you’re on your own when it comes to retirement.

1-Michael LierschIn the end, your heart is going to have a big say in these decisions, but understanding how each choice can affect you financially will help you make a more clear decision. Regardless of your decision, make sure you have a plan for your short-term and long-term finances.

Michael Liersch is Director of Behavioral Finance at Merrill Lynch.

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