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by Eve Kaplan, CFP(R) Practitioner

How do you decide if it makes sense to leave a job and become a stay-at-home parent? As a financial planner, I approach this topic strictly from the financial standpoint – I’m NOT saying it’s better be a stay-at-home Mom and I’m NOT saying it’s better to use child care and go to work.

For the record, I’ve been both a stay-at-home Mom and a working parent. Any parent will tell you being a stay-at-home IS a job – it’s just not a paid job.

What prompts me to look at this topic is a recent CNN Money article (4/18/12) titled “Moms: “I can’t afford to work.”
The article catalogues the rising cost of child care that eats into – or even exceeds – the take-home pay of working parents (in this case, a working mother). The Bureau of Statistics data underscore some of the underlying issues for stay-at-home Moms:

a) Although women exceed men in terms of educational attainment, their average income is $35,776/year.

b) $35,776/year is nearly 20% less than the average income earned by men.

Rising child care expenses present a heavy drag on family finances, but the CNN Money article overly simplifies the
decision one mother made (a Mrs. Hwang) because it merely compares the cost of child care for her children vs. the after-tax income she could otherwise earn. Clearly there are many ways to value of a job — and after-tax pay is only one of them.

Mrs. Hwang is a good stand-in for any stay-at-home parent. She related to CNN that her public school teacher salary
was $30,000/year after tax. She has 2 children and the cost of care for them is a relatively “modest” $18,000/year (the article notes she lives in Virginia, which has some of the lowest child care expenses in the nation). Mrs. Hwang felt it wasn’t worth it to continue work, although her husband can’t earn enough for them to live comfortably.

For the sake of argument, let’s say her child care expenses total $30,000 per year – the same as her after-tax take-home salary. And let’s assume Mrs. Hwang elects not to return to work, even after her children leave for college. On that basis, let’s compare ALL
components of her income to make a fair analysis of the “cost” of being a stay-at-home Mom – not just a flat comparison of a) child care costs vs b) after-tax salary:

1) As a public school teacher, each year of teaching accrues toward a retirement pension that pays Mrs. Hwang from retirement to the end of her life. Let’s assume her pension does not inflate once retirement commences (this is ine line with Gov Christie’s decision to freeze teacher and administrator pensions for decades to come). If Mrs. Hwang is 38 and chose to work to age 65+, she can accrue a lifetime pension that I calculate pays her at least $40,000/year (after tax) from 2039 (age 65) to the end of her life. This is a conservativeestimate based upon projected income levels and pension accrual. The value of this estimated
pension from age 65 to age 92 is $1,080,000 in 2039 dollars, or $554,000 in 2012 dollars.

2) Mrs. Hwang’s future social security payments would be higher if she continues to work since income generation drives projected social security benefits. After consulting with a number of specialists, potential “game changers” in social security render
calculations too tentative. However, one projection I ran indicated Mrs. Hwang could receive approx. $18,600 per year in retirement (agg 67 to the end of life) if she works, but only half that amount per year if she remains a stay-at-home parent (note: this does not include some build up in credits for work done from e.g. age 30-38). Since social security works like an inflating
fixed annuity, missed dollars obviously have an impact on Mrs. Hwang’s cash flow through her projected 25+ years of retirement.

3) Mrs. Hwang’s presumably has medical coverage through her husband’s job. It’s possible, however, that medical coverage through school would cost significantly less – possibly $6,000/year less (2012 dollars). Again, I use public schools teachers in NJ as an example since teachers here still benefit from generous subsidies for medical coverage.

4) Mrs. Hwang will miss access to a tax-deferred 403b savings plan through work. It’s not likely she has a match for her deferred savings, however, and it IS possible she could defer $5,000 per year in a spousal IRA, so the cost/benefit calculation here is a wash.

5) Mrs. Hwang will forego e.g. 1x salary life insurance available through work by staying at home. If she’s in good health, that benefit is worth at least $100/year.

6) Since Mrs. Hwang is a school teacher who presumably does not work in the summer, it’s possible her child care costs
may be less than a working parent who has the standard 2-3 weeks of vacation/year.

What is the effective value of work benefits Mrs. Hwang is giving up, apart from her income? In current 2012 dollars, it easily exceeds $700,000 over her lifetime. It’s possible the value Mrs. Hwang and her family assign to staying home with her children is “priceless,” but it’s also possible the Hwangs aren’t aware of the long-term cost of her decision to leave work. Either
way, the “cost”calculation of leaving work must include many benefits that aren’t immediately apparent when looking at take-home pay alone and comparing it with child care costs. Of course we haven’t discussed working parents who
work awhile, stop to raise children, and return to work thereafter. And we’re not addressing the benefits of staying “current” in a competitive work landscape. Like other decisions, there are both emotional and financial costs and benefits.

What’s the right answer for you and your family? I posit that a financial advisor provides meaningful input by running numbers to calculate the effective cost (or savings) if you decide to become a stay-at-home parent or if you’re thinking about returning to work.

At the very least, the cost/savings equation needs to include many more elements than just a flat comparison of “child care costs” vs. “take-home salary.” A good advisor can help you make a more informed decisions so you and your family avoid outliving your assets.

Copyright (C) 2012 by Eve Kaplan