The image of the stay-at-home spouse has come a long way since the days of June Cleaver and other 1950s television moms. One obvious difference is that today's at-home spouse is less likely to be female. More significant, though, is the increasing complexity of people's financial situations.
When meeting with couples with only one wage earner, financial advisers can play a crucial role in ensuring that neither partner is overlooked during the retirement-planning process and that both are properly prepared if their employment or relationship status changes unexpectedly.
A good topic to start with is Social Security.
Assuming that he or she earned only minimal income prior to retirement age, the stay-at-home spouse can receive a spousal benefit equal to half of the benefit paid to the working spouse. If the income-earning spouse dies, the surviving spouse can receive survivor's benefits (potentially up to his or her partner's full benefit) but no longer can receive the spousal benefit.
Most couples find that Social Security won't provide sufficient income during retirement, and the percentage receiving a defined-benefit pension is much lower than in the past. The gap that must be covered by individual savings is significant, and dollars set aside in a workplace plan may be responsible for the bulk of retirement income.
That could leave little or nothing in the name of the stay-at-home spouse. Advisers who find their clients in this situation may suggest the following remedies:
Spousal IRAs. Spousal individual retirement accounts are the one notable exception to the rule limiting contributions to an IRA for those who have no earned income. There are three options to consider:
• If the income earner isn't eligible for a retirement plan at work, contributions can be made to a deductible spousal IRA. If the income earner is eligible for plan participation, full deductible contributions to a spousal IRA still are possible if the couple's modified adjusted gross income is under $169,000. (Deductibility is entirely phased out at $179,000.)
• Roth IRA contributions can be made on behalf of the spouse. Income guidelines are the same as for a deductible IRA.
• If neither of these options is available, traditional IRA contributions can be made on behalf of the spouse and later be converted to a Roth IRA. This can work particularly well for an at-home spouse with no other IRA assets, as the conversion faces minimal tax consequences except for gains earned beyond the value of each contribution. If the at-home spouse does have other IRA assets, a “pro-rata” calculation must be completed to determine the taxable amount of the Roth conversion.
Hiring the stay-at-home spouse. In situations where the income-earning spouse is a business owner, the stay-at-home spouse can provide services for the business that can generate earned income. This might allow the stay-at-home spouse to qualify for the company's workplace retirement plan, effectively sheltering more of the couple's income from current taxation. It also could generate income that the at-home spouse could use to fund an IRA.
Gifting or joint tenancy. Another way to help a stay-at-home spouse create a retirement nest egg is to advise the income earner to make a gift of cash or stocks to his or her spouse. Tax laws allow unlimited gifting between spouses, without gift tax consequences, as long as both are U.S. citizens. This strategy provides greater financial balance in a marriage where the majority of retirement savings are held in the income earner's name through a workplace plan. An alternative approach (which may also be a gift) is to hold brokerage, bank and other financial accounts in joint tenancy.
Other considerations. It is common for clients to overlook the significant expenses that they would incur if the stay-at-home spouse were no longer able to care for children or elderly family members. Assigning a monetary value to each service performed within the home can help advisers begin a conversation about life and disability insurance. Failing to do so may put even the best-intentioned retirement plans in jeopardy.
Retirement planning is one of the many issues that are overlooked by couples who put a premium on the value of the income earner rather than on the contributions that both spouses provide. In these situations, greater effort may be needed on the adviser's part to ensure that the financial needs of both spouses are being adequately addressed.
Craig Brimhall is vice president of retirement wealth strategies at Ameriprise Financial Inc.