Stay at home or work? Financial factors to consider

Stay-at-home parenting presents various benefits and trade-offs. On one hand, you might love the chance to focus on spending time with your children. But on the other, you might hesitate about leaving behind a thriving career or living on just one source of income. The decision is as emotional as it is practical, and every couple should base it on their own views of what benefits their family most. To help you decide whether to stay at home or work, think through the following short- and long-term financial considerations.

Career earning power may decrease

Even if you take just a few years off from your career, it could hurt your earning potential when you return. While this isn’t a reality for all professions or job levels, it’s important to consider your overall career track when contemplating leaving the workforce, even for a relatively short amount of time.

Depending on your circumstances, you may benefit from continuing to work from home on a limited freelance or consulting basis. Even a modest level of continued professional engagement can help fill any gap on your résumé and give you the leverage you need to return to work without losing ground.

Social Security benefits may be affected

The amount you receive in Social Security later in life depends, in part, on your career earnings. Social Security calculates career earnings based on your 35 highest-earning years, so if you leave your job for only a few years, your benefits in retirement may not be affected. However, if a gap in employment hurts your earnings later in your career, it translates into a decreased Social Security payment when you retire.

You need more emergency savings

Families with one stay-at-home parent should consider having a larger emergency fund than families with dual incomes. Take a close look at your current finances to see whether your family has enough assets to fall back on if life takes an unexpected turn.

One way to build your nest egg is to have both you and your partner set aside 25 percent of your income six months before one of you plans to leave your job. This helps you build up your savings and allows you and your partner to see what it’s like to live off a smaller income.

Retirement planning may require more work

When determining whether to stay at home or work, consider that when you leave your job, you lose the opportunity to contribute to a workplace 401(k). You will no longer qualify for the tax advantages and employer matches often connected with these accounts.

Fortunately, there are alternatives. A spousal IRA may let you put some of your partner’s earnings into a separate tax-advantaged retirement account. And if you still work on a freelance basis, you may be able to open a SEP IRA or an individual 401(k), both of which allow for larger contributions than a regular IRA. Also, your working spouse can maximize his or her own 401(k) contributions to make up for the loss.

Regardless of your chosen path, try not to let retirement savings lag because one parent isn't working. Learn more about planning for retirement from Merrill Edge.

Don’t let a college savings plan take a backseat

Once your emergency fund is taken care of and your retirement savings are squared away, the next financial factor to consider when thinking about staying at home is planning for your child’s college. To get started, your family may want to consider a 529 college savings plan. 529 plans are flexible, tax-advantaged accounts that allow you to make large contributions to help you pay for college expenses. You won’t be taxed on your funds as they grow—and you pay no federal (and often state) income taxes on withdrawals used for qualified higher education expenses. Grandparents and relatives can also help by contributing to your child’s 529 plan. Merrill Edge has numerous college planning resources to help you start planning.

Note the cost advantages

Stay-at-home parenting certainly has its financial advantages. For one thing, it erases work-related costs such as dry cleaning and your daily commute. But the biggest advantage may be that you won’t need to rely solely on day care, which can make up a huge chunk of your budget.

Some families have the option to lean on friends and relatives for a portion of their child care, and others can engage in reciprocal care-sharing arrangements that can reduce costs. But if those options aren’t available to you, care can be pricey. While prices can vary widely, the National Association of Child Care Resource and Referral Agencies reports day care for a 4-year-old can cost more than $12,000 annually. The cost is greater if a family chooses to hire a nanny.

After comparing child care or day care costs with one parent’s income, parents—particularly those with multiple kids—may find that stay-at-home parenting doesn’t result in much of a financial crunch. Just remember to consider the factors above in addition to your household cash flow needs. 

Make a decision that’s right for you

“Can I afford to stay home?” The choice to stay at home or work is different for every family. With a clear understanding of the trade-offs, you can make the decision that’s right for yours.

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The material provided on this website is for informational use only and is not intended for financial or investment advice. Bank of America and/or its affiliates, and Khan Academy, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.

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Before you invest in a Section 529 plan, request the plan’s official statement from your Merrill Edge® Financial Solutions Advisor and read it carefully. The official statement contains more complete information, including investment objectives, charges, expenses and risks of investing in the plan, which you should carefully consider before investing. You should also consider whether your home state or your designated beneficiary’s home state offers any state tax or other benefits that are available only for investments in such state’s 529 plan. Section 529 plans are not guaranteed by any state or federal agency.

This material should be regarded as general information on Social Security considerations and is not intended to provide specific Social Security advice. If you have questions regarding your particular situation, please contact your legal or tax advisor.

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