One of the tougher decisions to make as a young parent is whether to take a career break, in one of its various forms, to bear and raise your children. While being a stay-at-home father is not as unheard of as in the past, this is a role that still primarily falls on the shoulders of the mother. Women are more likely than men to reduce their working hours or drop out of the workforce altogether to raise children. So, I am primarily talking to and about my fellow women and their financial well-being in this post.
Mothers are often unaware of the full financial ramifications of this choice. It is difficult to accurately assess the long-term financial trajectory of a career break when, let’s be honest, most of your days at this juncture in life are sleep-deprived and jam-packed with child activities.
It is a far more complex financial decision than it appears in the moment. The decision ultimately affects both your current and future well-being. So, how do you determine the full cost of a career break?
Beyond Childcare Costs: Forgone Wage Growth
Comparing your current annual earnings to your annual childcare expense is just a starting point. Many look at their current earnings potential relative to their childcare costs on its face and decide that the emotional toll of working outside the home is not worth it.
But it is not that simple. You must consider that you are also giving up the pay increases you would receive during your time out of the workforce. You also have to factor in the growth rate of those forgone earned assets over the course of your lifetime. That adds up quickly.
Additionally, you must consider the possibility of reduced earnings when you do go back to work. You may experience career stagnation, a knowledge gap, or a loss of skills, making you less competitive relative to the current workforce. Women who reenter the workforce after having children often see slower wage growth over time. In fact, U.S. Census Bureau research found that full-time working mothers with children under 18 earn 31% less than their male counterparts—about $17,000 less per year, or roughly $500,000 over a 30-year career.
The Impact on Retirement Savings
Those who leave an existing job must also understand that they will no longer be able to contribute to a qualified employer retirement plan. Furthermore, they are only able to contribute to an IRA if their spouse has earned income and they go so far as to make that contribution each year in their name.
Missing years of both employer and employee 401(k) contributions, along with the associated compounded growth, can significantly reduce your final retirement savings. These savings buckets, with their preferential tax treatment, are an essential part of a successful retirement plan.
How a Career Break Affects Social Security
America’s retirement system is somewhat stacked against mothers who stay home to care for their children. The Social Security system clearly rewards long careers and high pay. Although many have voiced concern and wonder about falling US birthrates, the system does not provide earnings credit for time spent out of the workforce raising children.
Here is how a career break directly impacts your benefits:
- The 35-Year Calculation: Social Security benefits are calculated based on your highest 35 years of earnings. Years with zero income are included in this calculation, significantly lowering your average. If you do not have 35 years of earnings, it results in lower lifetime monthly payments. By stopping work, you lose the opportunity to replace your early, lower-earning years with typically higher, later-career wages.
- Spousal Benefits & Divorce: A non-working spouse can receive a spousal benefit based on their partner’s work record, but only up to 50% of the spouse’s full retirement benefit (with certain restrictions). If you divorce, you may be eligible to collect off your ex-spouse’s record, but only if you were married for at least 10 years. This caveat increases the vulnerability of a stay-at-home parent whose marriage ends in divorce before the 10-year mark.
- Disability Access (SSDI): While this may affect a limited segment of the population, parents who took a childrearing break may experience limited Social Security Disability (SSDI) access should they ever need it. To qualify, a person usually must have worked 20 credits in the last 10 years. A stay-at-home parent with a scattered work history may not meet this requirement.
Weighing the Personal and Financial Value
Ultimately, I believe it is impossible to place a financial value on the work and time spent raising your children. The non-financial benefits of having a stay-at-home parent are deeply personal and different for every family. They can include being deeply and constantly present for your child, consistency of routines, and easier household management and logistics, to name just a few.
Each family has a different work and childcare situation and must do what is best for them. However, if this is a move that you are considering for your young family, you don’t have to guess how it will impact your future. Reach out to the team at THOR Wealth Management to run a few different financial plan scenarios. By factoring in the short- and long-term financial implications, we can help you make an informed, confident decision for your family’s future.
