In many families both parents work full-time jobs, but in the Northeast a lot of families are able to make ends meet with only one spouse working full-time (or the other spouse works a very limited part-time schedule).
Unfortunately, all the financial planning that is done is almost always from the perspective of the higher-earning spouse. Homemakers need to plan, as well. There are several areas of planning that homemakers need to keep in mind.
Life Insurance This is an area where both spouses generally do not do a very good job of planning. Breadwinners in many families only carry insurance through their employer. Even opting for the optional insurance offered through their employer’s benefit plan does not provide adequate coverage for the family. To take it a step further, there is a major misconception that if a spouse is not working that they do not need to have any life insurance.
This can be a big problem if the homemaker passes away. The couple should evaluate the amount of insurance needed by looking at what it would cost to employ someone to do what the non-working spouse does. In addition, if the working spouse routinely works overtime, the needs of the family may not allow for this if their spouse is no longer alive. So, the value of the potentially lost income should be factored into this calculation, as well.
Finally, the homemaker spouse may have intended to return to the workforce after the family’s children reach a certain age. The lost income from this job may have been targeted for college expenses, etc. This is another item that needs to be taken into consideration.
Retirement Savings Many people are not aware that their non-working spouse can still make a contribution to a traditional or Roth IRA. It can be difficult to be disciplined enough to put additional money aside to fund their IRAs, but over a long period of time, it can become a significant retirement asset.
If you were able to invest $5,000 per year in an IRA ($416 per month) and earn 7 percent per year, you would have more than $217,000 after 20 years. If you are able to make Roth IRA contributions, none of the $217,000 would be taxable.
In general, people are not contributing enough to their retirement savings. Some are putting money aside for their children’s college education in lieu of retirement. You should always look to fund your retirement first and education second. Estate Planning This is an area where both spouses have done very little planning. I cannot tell you how many couples I meet with who do not have the basic essentials in place: will, power of attorney and living will. These are imperatives for every adult out there – single and married alike. As discussed in my prior column, when children are in the picture, you owe to your family to make sure all the critical planning areas are nailed down. This is an important one. Social Security Non-working spouses can qualify to receive social security based on their working spouse’s benefit, but it usually amounts to half of what the spouse receives. If the spouse retires early (age 62) the benefit is reduced up to 30 percent from what it would be at full retirement age.
If your kids are grown, it may behoove you to return to the workforce to qualify for social security under your own benefit. It takes 40 quarters of work (equivalent of 10 years – including part-time work) to qualify. The extra income and the potential for a higher social security may be worth it.
I hope we surfaced a few things for you to think about as you plan your future. Remember, it is never too late to right your financial ship.
Jim Heisler is a Certified Financial Planner with Family Wealth Services in Holmesburg. You can read all his Financial Perspective columns here.
Registered Representative, Securities offered through Cambridge Investment Research, Inc., A Broker/Dealer, Member FINRA/SIPC and Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. Family Wealth Services, LLC and Cambridge are not affiliated.
Jim Heisler, CFP®, CDFA™, CASL™ Family Wealth Services, LLC is located at 8275 Frankford Ave. (215-332-4968)