Financial Literacy 2007 - Retirement
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Protecting a caregiver's retirement savings

Staying home or cutting back hours to raise children or to tend to an aging parent is a loving and noble thing to do. But it's also expensive.

It's not just income you're losing. Retirement benefits -- from employer-sponsored savings to Social Security -- take a hit as well. If you're married, a working spouse must work extra hard to make up funding gaps, while an at-home spouse puts his or her financial future at the mercy of others. At the same time, you may be digging deeper into your wallet to cover health care costs and other expenses.

What to do? No one can or should tell you what's best for you or your family. But it's imperative to make a fully informed choice that considers the financial ramifications of caring for children full time or taking on the responsibility of looking after an older relative, says Cindy Hounsell, executive director of the Women's Institute for a Secure Retirement.

"I understand there are emotional reasons, but you have to understand you're making a serious, life-defining decision, too," says Hounsell.

First, here are some statistics to mull over. Median income in a household where someone is caring for an older parent or an individual over the age of 18 is just over $37,300. That's far lower than the $42,400 median for households without a caregiver, according to research by AARP and the National Alliance for Caregiving.

That same study found that among caregivers who do work, 57 percent arrive late, leave early or take time off during the day to look after someone. One out of 10 switches from a full-time schedule to part-time work. Five percent lose job benefits. Four percent turn down promotions.

A woman who quits to care for someone will lose $659,139 in wages, pension and Social Security based on an annual salary of $35,000, according to the National Alliance for Caregiving.

Of course, opting out of work has ripple effects that impact the entire family. A married couple will have to rely on reduced retirement savings when one spouse stays home. A widow who raised children at home may need to rely on them when her own nest egg runs out. The unmarried sibling who scales back work hours to tend to an older parent may not have anyone to help pay the bills.

Grim scenarios like these make it all too easy to ignore the future. But here's some encouraging news. It's not impossible to make up ground and to minimize the impact on your retirement, should you decide to take time off or scale back on work to care for loved ones.

7 ways for caregivers to tend their nest eggs
  1. Pay attention to that 401(k).
  2. Fund a spousal IRA.
  3. Remember vesting.
  4. Plan on working longer down the road.
  5. Make up for lost ground.
  6. Safeguard existing savings.
  7. Turn parents into a deduction.

1. Pay attention to that 401(k).

Sure, you've left work and no longer contribute to one of these nifty plans. But your spouse still does. How much does he -- or she -- contribute? Since you're both going to rely on that nest egg in the future, make sure your spouse funds the plan to the maximum. The switch from a dual-earning family to one that's supported by a single wage earner may make it more tempting to scale back contributions than boost them. Don't relent. Scour your budget and find ways to increase contributions gradually over time.

2. Fund a spousal IRA.

Just because you're not working doesn't mean you can't put away something in a tax-friendly retirement plan. A spousal IRA is just a fancy way of saying contributions can be made in your name to an IRA of your choice, but you've got to be married to do this and you may have to meet certain income eligibility requirements depending on the IRA you pick.

This year, you can stash up to $4,000 into an IRA (with an additional $500 for individuals over 50). Doesn't sound like much? Think again. Let's say a young mother has $4,000 put into a spousal IRA every year for eight years while she takes time off to raise young kids. If the money earns 8 percent annually, there'd be $45,950 by the time she went back to work. If she left the money untouched and that $49,950 continued to grow at an average of 8 percent annually for 30 years -- say until she was ready to retire -- the IRA would be worth $462,379.

Impressive, right? Yet the potential value of spousal IRA is too often overlooked, says Ed Slott, a CPA and editor of the Web site "If a couple has the money to do it, they should open one. Otherwise, they're giving up an opportunity to build up retirement accounts," says Slott.


If you do opt to open an IRA, make sure you follow through and fund it. Arrange to have deposits automatically made into the plan each month. You'll be less likely to miss the money coming out of your day-to-day budget if you put savings on autopilot.

"When you take time off, you're putting all your eggs in somebody's basket, so you need to be sure there will be money there when you need it," says Hounsell. "If you're going to make the decision to stay home, and your spouse isn't willing to fund a retirement plan for you, maybe you need to rethink it."

3. Remember vesting.

Often, you may not have a choice about leaving work. But if you've been at your employer for a while, and plan to leave to stay home with a child or parent, first be sure you aren't squandering valuable retirement benefits.

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