Expert: Here's how to financially protect your family when you leave the workforce
Jill Hitchcock is the senior executive vice president responsible for the U.S. private client group at Fisher Investments, a fee-only investment adviser.
As the coronavirus pandemic causes many schools to shift to virtual learning and more people work from home, some parents may consider leaving the workforce temporarily or even permanently to take care of the kids.
If your family is able to lean on just one partner’s income, you’re lucky to have the luxury of choice. Many families don’t have this option! But in making this decision, families sometimes overlook the new risks it brings, primarily for the partner who leaves the workforce.
When you leave the workforce, you give up your current earnings and future earning potential. You may also give up skill development, career growth, and salary progression — and you leave a big gap on your resume. The longer you’re out of the workforce, the bigger the risk.
I’m not saying you shouldn’t stay home — that may be the right choice for your family. And frankly, I think it’s the harder job! But the decision for one of you to leave the workforce needs to be made jointly. Both partners need to acknowledge the risk and take steps to protect against it.
If you are thinking about quitting your job to be a stay-at-home parent, here are three things that can help you financially protect yourself and your family from the unexpected.
Life insurance to complement savings
How much money would you need if your spouse passed away and you weren’t able to go back to work? That may seem unlikely — but it can and does happen. I became a widow at 37 when my husband passed away, leaving me to raise our 5- and 2-year-old sons on my own. Through that experience, I met many surviving partners who had to deal with devastating financial situations on top of their grief.
Many people just get a small life insurance policy, thinking it’s only for immediate expenses, like funerals or debt. That’s one element, but that isn’t really why you need it. If you stepped away from the workforce or if you’ve been working in a lower-income profession, it may be tough to find work at a salary that will allow you to cover all your expenses, especially when you add in the cost of additional childcare. The role of life insurance in this scenario is to support the family and complement your savings until the surviving partner can better support the family on their own.
So don’t underestimate how much you may need — overestimate it to be safe. Think about what it would cost to support your family if you had to rely only on your savings and life insurance alone. How many years it would take you to re-start your career? Or to rebuild your depleted savings? Depending on your expenses and the cost of living in your area, that could be a big number.
Luckily, there are affordable life insurance options out there, especially if you get your policy when you’re relatively young and in good health. One common type of life insurance for working families who are raising children is term life insurance, which costs significantly less than whole-life insurance because it is only valid for a certain period of time — usually 10, 20, or 30 years.
Prenuptial—or postnuptial—agreement
Yes, I know there’s a negative connotation, but hear me out. A prenuptial agreement (aka prenup) is a legal contract you sign before marriage to define what property and assets belong to which partner in the event of divorce or death. A postnuptial agreement (postnup) is similar but made after you’re already married. Both can be tools to understand how you’ll handle the division of assets and ongoing support before one of you leaves the workforce.
Many people see these agreements negatively because they’re often portrayed as “bad karma” for a marriage or as applying only to the extremely wealthy. When I got married, we didn’t get a prenup because we were broke and figured, “What’s the point?” But that was short-sighted and naïve!
You won’t always be broke and the sad reality is nearly 40% of all marriages end in divorce. In that case, the partner who left the workforce can be at a major disadvantage with a big resume gap and outdated skills. Plus, the income that previously supported one household now has to support two, reducing the amount available for each partner.
A prenup or postnup can compensate the partner who took on the risk to stay at home in a way you both agree is fair. It’s far easier to discuss how you’ll handle protecting the partner who leaves the workforce before you get married or while you’re still happily married than when tensions and emotions are high in a divorce situation.
Pencil it in as a topic for a financial date night — a “what if” that hopefully never happens. Yes, it can and probably will be a difficult conversation but planning, even for an unlikely outcome, is sensible, and it could help your family avoid stress and potential financial hardship down the road.
Your employer
When my husband was sick, my company was incredibly supportive and allowed me to take time off to care for him. And they still accommodate my single mama schedule today. But I know a lot of people who don’t have such accommodating employers.
If you or your partner are considering staying home with family, consider your alternatives and talk with your employer before quitting. Maybe they’ll work with you!
Another option is to maintain some employment, even if for fewer hours or on a freelance or consulting basis. This way, you keep your skills up-to-date, maintain your professional contacts, and earn some income, too. Finally, if you work in a profession that requires a license or certification, keep those up to date so you’ll be ready to return to work if you want or need to.
The unexpected and tragic events of 2020 have many families rethinking everything. For some families, it makes sense for one partner to leave the workforce to do the heavy lifting at home. If that’s the right decision for your family, discuss the pros and cons openly, acknowledge the risks, and take steps to protect yourselves.
Read more information and tips in our Family section
