August 01, 2013

The Homemaker Retirement Plan

Credit: Ambro
There is a lot of financial advice out there for people who are working and for people who are retired. I like to think I’ve helped add to that. However, there is also a pretty sizable group of people who a lot of the best and brightest financial gurus, and your humble blogger here, don’t address nearly often enough: homemakers. A few Google searches and a personal reflection on all of the financial articles, commentaries, and calls I’ve read and listened to over the past several years confirmed my suspicion that financial advice for homemakers is pretty limited, so I hereby dedicate this post to the homemakers of the world. This one’s for you!

“Stay-at-home moms,” “Mr. Moms,” spouses who don’t need to work, spouses who don’t want to work – whatever you want to call them – for a few minutes, let’s call them homemakers. As I mentioned earlier, it's the working spouses who are usually sought after by the lawyers, insurance agents, and brokers of the world, but I believe homemakers, too, have a need for some very important financial planning. So here are three suggestions to help homemakers work toward a successful retirement plan, hopefully just like their employed spouses.
  • Insurance- It’s crucial to make sure both the breadwinner’s and the homemaker’s lives are adequately insured.
    • It may seem like a no-brainer to have a sizable life insurance policy on the breadwinner, but is it enough? Is the policy large enough to allow the homemaker adequate time to jump into the labor force? Is the policy large enough to allow the homemaker and the rest of the immediate family to maintain their lifestyle if the homemaker’s salary is not going to be as large as the breadwinner’s salary was? If there are young kids involved, is the policy big enough to provide for the additional supervision expenses that will be incurred if the homemaker has to go into the office instead of run the household?
    • Some of you may ask why you would want to pay for a life insurance policy on a homemaker. Well, if young kids are involved, is the breadwinner going to quit an income-producing job and run the household if the homemaker has an unfortunate demise? In many cases, that’s probably not a sustainable option, so factoring in the additional supervision expenses that will be incurred by the breadwinner if the homemaker is unable to run the household is a necessary consideration and can probably best be addressed by a relatively small and short-term life insurance policy.

  • Spousal IRAs- Not many of those brokers obsessed with only the working spouse cover this, but the non-working spouse can now also make annual IRA contributions ($5,500 per year or $6,500 if over age 50) as long as their working spouse has enough earned income ($11,000 per year or $13,000 if over age 50) to cover both of their contributions. Five or six thousand dollars a year may not sound like a healthy retirement plan right off the bat, but let’s say a homemaker was able to stash $5,000 away in a Spousal IRA every year for the thirty years their spouse worked - that would be $150,000 assuming no stock market growth at all! Isn’t it crazy that by diligently saving and contributing a few thousand dollars a year to a Spousal IRA that a homemaker could end up with a retirement account comparable to many people who are actively employed for their whole working life?

  • Managing Expenses- Some homemakers may consider themselves the head of their household, while others might consider their employed spouses the head of their household. Either way, I think it’s probably safe to say that the homemaker has a clearer understanding of the day-to-day operating expenses of the home. Therefore, I think it is crucial for the breadwinner (who probably has a better idea of the future income coming in) and the homemaker to keep each other updated on their financial forecasts. A homemaker’s insights on upcoming expenses and cash flow needs can be valuable information to the breadwinner (and even their financial planner) in making sure the family budget is going to work.
I think the three suggestions above should definitely be considered by all homemakers and their spouses, but if I haven’t convinced you, let me try one more way… I hope you will pardon me for being rude, but do you make more than $96,261 per year? You see, I read an article early last year that showed what you would have to pay a chef, house cleaner, driver, laundromat, lawn care provider, and child care provider to do the average tasks done by a homemaker, and $96,261 was the number the article landed on! With that being said, I think it’s safe to say that although a homemaker’s work may not earn the big bucks, a homemaker’s work is often worth the big bucks, and therefore deserves proper financial planning considerations!