Before You Opt Out
Financial advisor Jeffrey Landers once counseled a doctor who gave up her career to raise five children. After 15 years out of the workforce, the woman was getting divorced and facing the prospect of trying to earn a living with skills and connections that were woefully out of date.
Most stay-at-home parents aren't giving up six-figure incomes, but then again, most probably aren't thinking about what divorce could mean for their financial future. Staying home to raise your children may be the right choice for your family, but since stepping away from your career can leave you economically vulnerable, here's what you need to know before you do it — and why you should consider a postnup.
The Time-Out Penalty Is Large
Taking a single year off from work can decrease a woman's average annual earnings by 20 percent, controlling for education and hours worked, according to a study for the Institute for Women's Policy Research. Two to three years off drops earnings by 30 percent. Men suffer an even greater penalty: a 23 percent loss after one year and 35 percent after two to three years.
There are always exceptions, of course: the stay-at-home parent who launches a successful business or who uses some of their time off work to train for a new, more lucrative career. Most people, though, lose career momentum when they take time off. They miss out on raises, retirement contributions, and networking opportunities enjoyed by peers who stay in the workforce.
Don’t Count on Generous Alimony
Back when few women worked and "at fault" divorce law prevailed, alimony was seen as a form of damages paid by "guilty" husbands to discarded wives who would otherwise tumble into poverty, according to attorney Laura Morgan of Family Law Consulting in Charlottesville, Virginia.
These days, many courts are reluctant to grant long-term alimony unless the marriage itself was long term. "If you have a 40-year marriage and you have a dependent spouse who hasn't been in the workforce for many years," Morgan says, "that is still a case for indefinite alimony."
With most divorces, though, stay-at-home parents are typically expected to go back to work to support themselves, Morgan says. Courts look at how long it likely will take for a dependent spouse to become self-supporting. "Then they give her the money to get by (for that time) and send her on her way," Morgan says.
Alimony or spousal support is separate from child support, which is typically granted according to state-specific formulas and usually ends when the child is 18.
Rich or Poor, You're Vulnerable
The two largest pools of stay-at-home parents are on opposite ends of the economic scale. Most stay-at-home parents are women with the poorest husbands — men in the lowest 25 percent of earners, according to an analysis of government data prepared for the Council on Contemporary Families. The next largest group of stay-at-home parents is women with the richest husbands — those in the top 5 percent of earners.
Since most people marry those of similar education and socioeconomic backgrounds, it could be that wives of poorer husbands may not be able to earn enough to offset the rising costs of childcare. Divorce can add even more financial insecurity to their lives.
Those with high-earning husbands may have the farthest to fall, since they're unlikely to be able to earn enough to maintain their former lifestyles.
Why You Need a Postnuptial Agreement
Understanding the economic risks they're facing can help stay-at-home parents take measures to reduce their vulnerability. Those can include working part-time, staying in touch with professional contacts, or starting a small business that can be expanded as the kids get older.
Another way stay-at-home parents can protect themselves is to have an attorney draft a postnuptial agreement, says Landers, author of Divorce: Think Financially, Not Emotionally. Prenuptial agreements allow not-yet-married couples to spell out who gets what in the event of a divorce. A postnup can serve the same function after a couple marries. Ideally, the spouses can decide on a division of assets that allows each to maintain a certain standard of living.
One strong reason for a postnup is that "memories fade," Landers says. Many of his clients believe the decision to stay at home was a mutual one. Their soon-to-be exes, though, say otherwise. “They say, ‘What are you talking about? That's what you wanted,’” Landers says. "It's a lot easier to get this [agreement] done when there's no acrimony."