If you’ve taken the decision to be a full-time, stay-at-home parent, there will no doubt be a number of financial issues you will need to consider. As we all know, children are expensive – and the transition from double-income to a single-income household is likely to be a difficult one. However, one aspect of financial planning that many couples tend to overlook at this life stage is how the stay-at-home parent will fund their retirement. [Please note that in the interview the example of a stay-at-home mother was used.]
Besides the added risk of being wholly dependent on one person’s income, the stay-at-home parent takes on an additional set of risks when it comes to their retirement future. Without an income of their own, they will be unable to build their own wealth, and this can leave them in a financially vulnerable position if the marriage were to come to an end.
As such, a spouse’s decision to stay at home and raise children should form part of a couple’s joint financial plan to ensure that steps are taken to reduce risk and ensure that the stay-at-home parent is adequately provided for. Here’s what to consider.
Preserve your retirement fund benefits
If you’ve resigned from your employment in order to raise children, consider preserving your retirement fund benefits in a preservation fund. This capital, even if it’s a nominal amount, will enjoy the benefits of compounding interest over time. While you also have the option of transferring the capital into a retirement annuity, as a non-income earner, there are no tax benefits for doing so. Further, unlike a retirement annuity, a preservation fund allows you to make one full or partial withdrawal from the fund before the age of 55.
Being housed in a preservation fund, the investment of these funds will be regulated by Regulation 28 of the Pension Funds Act, which limits the amount of high-risk exposure in the fund, although given that your investment could have a 30- to 40-year horizon – depending on what age you decide to have your children – your investment could enjoy sizeable investment growth over that time period.
Ensure that your spouse is saving for retirement
As a single-income family, saving for retirement will be a lot more challenging, and it is important to ensure that your spouse is investing appropriately for your joint retirement. Whether saving through their employer’s retirement fund or through a retirement annuity structure – or a combination of both – they will be entitled to invest up to 27.5% of their taxable income, up to a maximum of R350 000 per year, on a tax-deductible basis. That said, keep in mind that your ability to claim a share of your spouse’s retirement fund benefits should your marriage end in divorce is dependent on the nature of your marriage contract, which is addressed in the paragraph below.
Understand your marriage contract
The nature and terms of your marriage contract impact greatly on your joint financial planning as it sets out the financial consequences of your marriage. If you are married in community of property, you and your spouse each own 50% of the joint estate in equal, undivided shares. If your marriage comes to an end through a divorce, you have an automatic 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 will have no claim to your spouse’s pension interest in the event of a divorce. If you are married with the accrual system, your spouse’s pension interest will form part of the accrual calculation, unless it has been specifically excluded in your ante-nuptial contract. Be sure to check your ante-nuptial contract to ensure that this is not the case, as this can severely prejudice your financial future.
Have a discretionary investment in your own name
Having a discretionary investment in your own name may give you peace of mind that you will have access to capital should tragedy strike or should your marriage come to an end. As part of your joint financial plan, your spouse could contribute a predetermined amount on your behalf into a unit trust portfolio with a view to building wealth in your own name. While there are no tax incentives for investing in a unit trust structure, keep in mind that your funds will not be subject to the provisions of Regulation 28, and you will therefore be able to invest more aggressively for the future.
Ensure that your spouse has sufficient life cover in place
Very importantly, you will need to ensure that your spouse has sufficient life cover in place to not only make provision for your living costs and the care of your children, but also for your future retirement funding. As part of the joint financial planning process, your advisor should take your retirement objectives into account and then capitalise the lump sum you would need if your spouse were to die today. It is important that the policy is correctly structured and that the beneficiary nomination reflects your estate planning intentions.
Remember, if you are named as the beneficiary [of] the life policy, the proceeds will bypass your spouse’s deceased estate and will be paid directly to you, meaning that no estate duty will be paid on the proceeds. Where your spouse’s estate is the nominated beneficiary, the proceeds will be paid into the estate and could be subject to estate duty – meaning that the net amount may be insufficient for your retirement needs.
Have a Plan B in place if your spouse loses their job
A single-income family naturally faces greater risk when it comes to job loss or retrenchment, so it is important to put plans in place to mitigate the risk as much as possible. One option is to take out retrenchment cover on your spouse’s life, although this type of cover is fairly expensive and generally limited to a period of six months. Naturally, building an emergency fund to fortify your finances against retrenchment is essential, although it may take time to build up to a comfortable level. You and your spouse will need to carefully assess the risks that they face in terms of loss of income, job loss, or retrenchment, and then ensure that you have a plan B in place should the eventuality arise.
Remain actively involved in your joint financial planning
Most importantly, it is absolutely essential that the non-earning spouse remains actively involved in both the day-to-day management of the household finances as well as the longer-term planning. Not having a firm grip on your joint financial plan can leave you financially stranded and vulnerable if your marriage were to come to an end.
Stay-at-home parenting is hard work, and it is important to not underestimate the economic value of the job you are performing. While you may not be generating an income, you are contributing economically by running the home, raising the children, grocery shopping, preparing meals, and handling day-to-day operations at home. It is in your best interests to know exactly what is going on when it comes to money, finances, and your future retirement planning.
Consider generating an income from home
Once your child is a little older, consider generating some form of income from home as a means of fortifying your financial position and making additional investment contributions in your own name. The Covid-19 pandemic has created numerous opportunities for generating an income from home, so spend some time doing your research and exploring the options appropriate for your skills and expertise. Remember that 27.5% of your taxable income can be invested on a tax-deductible basis towards a retirement annuity in your name.
Keep relevant so that you can re-enter the workforce
Once your children are old enough to attend school, you may want to consider re-entering the workforce. If this is the case, you will need to ensure that your skills and qualifications remain up-to-date and future proof. Even though you are not currently working, make a concerted effort to stay abreast of industry-related news and advancements, and to keep in contact with your professional network. This will stand you in good stead should you ever want to return to the workforce.