The decision to be a stay-at-home parent (SAHP), whether driven by personal values, cultural pressure, or emotional desire, can have enormous financial implications for the whole family, and our advice is to step into the role of SAHP with eyes wide open. Raising a family on a single income comes with a number of inherent risks and lost opportunities, and it is important to understand the long-term effects of such. Over and above the loss of income, the SAHP stands to lose out on the compounded growth of that income as well as future retirement savings. Further, lack of financial independence creates a barrier to exit should the relationship sour – creating a lose-lose situation for the SAHP. In this article, we explore mechanisms that couples can employ to create financial independence for the parent that chooses to stay at home and raise the children.
Not earning an income means that the SAHP does not benefit from the tax advantages of contributing towards a retirement fund which means that the couple’s retirement savings are invested in the name of the breadwinner. Depending on the nature of the couple’s matrimonial property regime, the SAHP may have a claim to a share of her spouse’s retirement fund in the event of divorce, although such negotiations may be protracted, especially in the case of an acrimonious divorce – and it doesn’t change the reality that during the subsistence of the marriage, the SAHP, in most cases, will have little to no investments in their own name. Opening a discretionary investment in the name of the SAHP is an excellent way of creating financial independence for him/her – and while there are no tax incentives for investing through a discretionary unit trust structure, keep in mind that the funds will not be subject to the provisions of Regulation 28 and, as such, can be invested more aggressively for growth.
Life insurance for the breadwinner
As the household will be wholly financially dependent on the breadwinner, insuring the life of the breadwinner is of critical importance as this will provide the SAHP with capital in the event of their spouse’s death that can be used to settle debt and provide for the family’s income needs. As part of the joint financial process, your advisor should prepare ‘first-dying’ and ‘second-dying’ spouse scenarios to establish the capital needs of the surviving spouse in the event of death. Your advisor will also help to structure the insurance policies to ensure that the proceeds are paid directly to the surviving spouse and are not subject to the estate administration process.
Joint financial decision-making
Having a single breadwinner creates a household model where one partner is wholly financially reliant on the other – a situation that can be unhealthy for a relationship. To ensure that both partners have a voice, it is advisable that regardless of who generates the income, both partners remain fully involved in all financial decisions with clearly defined roles and responsibilities. Although it is difficult to accurately calculate the economic value of the SAHP, it is important to remain cognizant of the fact that he/she contributes significantly to the economy of the home and deserves a seat at the table when it comes to making financial decisions whether operational or strategic in nature.
Saving for a joint retirement
It makes sense for the breadwinner to make use of the tax incentives of investing towards a retirement fund, keeping in mind that as a taxpayer he/she is entitled to invest up to 27.5% of taxable income, capped at R350 000 per year, towards a retirement fund. Remember, while all retirement funding will be in the breadwinner’s name, the purpose of the funds is to provide retirement income for both partners. As such, the breadwinner has a responsibility to the SAHP to invest an adequate portion of his/her income toward their joint financial future. As mentioned above, in the event of a divorce prior to formal retirement, the SAHP may have a claim for a share of the retirement funds – although, having said that, it is extremely difficult for one person to save sufficiently to support two people’s retirements, so be sure to do the numbers before making the decision to give up work.
Bank accounts and contracts
It is important that the SAHP has bank accounts and contracts in his/her name. Not only will this help create a positive credit record for the SAHP but will provide him/her with access to funds in the event of emergency or tragedy. A well-managed bank account is essential for applying for credit, taking out a cell phone contract, building a credit score, FICA, and general day-to-day transacting. In the absence of such, the SAHP may find themselves in a financially vulnerable position should the marriage come to an end acrimoniously. As part of the joint financial planning process, the couple should ensure that the SAHP is set up with his/her own bank account, cell phone contract, a vehicle registered in his/own name, and any other accounts or contracts that will ensure his/her functional financial independence.
A single-income family naturally faces greater risk when it comes to job loss or retrenchment, and it is important to put plans in place to mitigate the risk as much as possible. An emergency fund sufficient to cover at least six months’ worth of household expenses is advisable to ensure that the family can survive financially while alternative employment is sought. Ideally, use scenario planning to ensure that both partners can fully appreciate the potential risks of loss of income, job loss, or retrenchment, and then mitigate appropriately against those risks.
Matrimonial property regime
Many couples seek to understand the financial implications of their marriage contracts when the marriage disintegrates, and only fully appreciate its import on their personal finances when the marriage is already at its end. A marriage contract effectively sets out the financial consequences of your relationship and it’s important to understand how these impact your respective estates both during the course of your marriage and at its dissolution.
The rapid pace of technological advancement and industry disruption means that even a few years out of the job market could significantly impact one’s future employability. In a downturned economy with unemployment rates at over 30%, re-entering the job market after being a SAHP can be particularly challenging. While the intentions may be to stay at home until the children reach school-going age and thereafter re-enter the job market, this may not be practically possible given the economic climate we now find ourselves in. A couple’s joint financial plan should take into consideration the future employment prospects of the SAHP, the extent to which the household finances depend on his/her ability to generate income at some point in the future, and steps that the SAHP should take to remain professionally and economically future-ready.
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