When a parent chooses to become a full-time, stay-at-home caregiver, several financial considerations must be addressed. Raising children is expensive, and the shift from a dual-income household to a single income can be challenging. However, a crucial aspect of financial planning often overlooked during this transition is how the stay-at-home parent will save for retirement. Beyond the inherent risk of relying solely on one income, the stay-at-home parent faces additional retirement-related risks. Without a personal income, they are unable to accumulate their own wealth, which may place them in a financially precarious position, particularly if the marriage ends. Therefore, the decision for one spouse to stay at home and care for the children should be incorporated into the couple’s overall financial plan. This approach ensures that adequate provisions are made to mitigate risk and safeguard the stay-at-home parent’s financial future. Here are the key factors to consider when planning for this important life stage.
Preserve your retirement fund benefits
If you’ve left your employment to raise children, it is wise to consider preserving your retirement fund benefits in a preservation fund. Even a modest sum invested in this way will benefit from the power of compound interest over time. While transferring your capital into a retirement annuity is another option, note that there are no tax advantages for contributions made for non-income earners. Additionally, a preservation fund offers greater flexibility than a retirement annuity, as it allows for one full or partial withdrawal before age 55. By placing your savings in a preservation fund, your investment will be regulated under Regulation 28 of the Pension Funds Act, which limits high-risk exposure. However, given the potential for a 30- to 40-year investment horizon – depending on when you choose to have children – this strategy allows for considerable growth over time, ensuring that your retirement savings continue to work for you while you are focused on raising your family.
Ensure that your spouse is saving for retirement
As a single-income family, saving for retirement becomes significantly more challenging, making it essential that your spouse invests appropriately for both of your futures. Whether contributing to an employer’s retirement fund, a retirement annuity, or a combination of the two, your spouse can invest up to 27.5% of their taxable income, capped at R350,000 annually, on a tax-deductible basis. However, it is important to note that your entitlement to a portion of your spouse’s retirement fund in the event of a divorce depends on the terms of your marriage contract. Understanding these provisions is crucial to ensuring that both partners are adequately protected in any future financial scenarios.
Understand your marriage contract
The terms of your marriage contract play a pivotal role in your joint financial planning, as they define the financial consequences of your marriage. If you are married in community of property, both you and your spouse own 50% of the joint estate in equal, undivided shares. In the event of a divorce, you automatically have a right to 50% of your spouse’s retirement fund benefits. However, if you are married out of community of property without the accrual system, you have no claim to your spouse’s pension interest upon divorce. If married with the accrual system, your spouse’s pension interest is included in the accrual calculation unless explicitly excluded in your ante-nuptial contract. It is essential to review your ante-nuptial contract carefully to ensure this exclusion does not apply, as it could have a significant impact on your financial future.
Have a discretionary investment in your own name
Holding a discretionary investment in your name can provide peace of mind by ensuring access to capital in the event of a tragedy or divorce. As part of your joint financial plan, your spouse could contribute an agreed-upon amount into a unit trust portfolio, helping you build wealth independently. Although discretionary unit trust investments offer no tax incentives, the advantage lies in the fact that your funds are not subject to Regulation 28 provisions. This allows for more aggressive investment strategies, potentially accelerating growth and enhancing your financial security over the long term, regardless of the unforeseen circumstances life may bring.
Ensure that your spouse has sufficient life cover in place
It is essential to ensure that your spouse has sufficient life cover to provide not only for your living expenses and the care of your children but also for your future retirement funding. During the joint financial planning process, your advisor should consider your retirement goals and calculate the lump sum you would require if your spouse were to pass away today. It is critical that the policy is correctly structured, with the beneficiary nomination aligned to your estate planning objectives. If you are named as the beneficiary, the life policy proceeds will bypass your spouse’s estate and be paid directly to you, exempt from estate duty. However, if the estate is the beneficiary, the proceeds will be paid into the estate and may be subject to estate duty, potentially reducing the net amount available. This could leave you with insufficient funds for your retirement, making careful structuring of the life policy a key consideration in your financial plan.
Have a Plan B in place if your spouse loses their job
A single-income family faces heightened risk in the event of job loss or retrenchment, making it crucial to implement risk mitigation strategies. One option is to consider retrenchment cover for your spouse, though this type of insurance tends to be expensive and typically only provides benefits for up to six months. Building a robust emergency fund is also essential, but it may take time to reach a comfortable level of savings. You and your spouse should carefully evaluate the risks associated with income loss, job instability, or retrenchment and ensure that you have a contingency plan in place to safeguard your financial security in case such an event occurs.
Remain actively involved in your joint financial planning
It is crucial that the non-earning spouse remains actively engaged in both the daily management of household finances and long-term financial planning. Without a clear understanding of your joint financial situation, you may find yourself financially vulnerable should your marriage end. Stay-at-home parenting is demanding work, and its economic value should not be underestimated. Although you may not generate an income, you contribute significantly by managing the household, raising the children, handling grocery shopping, preparing meals, and overseeing day-to-day operations. To protect your financial well-being, it is in your best interest to stay informed about your finances, understand your joint financial plan, and take an active role in planning for your future retirement.
Remain relevant so that you can re-enter the workforce
Once your children start attending school, you might consider re-entering the workforce. To prepare, ensure your skills and qualifications are current and future-proof. Even while not working, make it a priority to stay informed about industry trends and advancements, and maintain connections with your professional network. This proactive approach will benefit you greatly should you decide to resume your career, helping to ensure a smoother transition and positioning you for future opportunities in the workforce.
Have a wonderful day.
Sue
