Retirement savings, life insurance, Social Security maximization should be on your radar.
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By Christine Benz | 12-20-10 | 06:00 AM | Email Article

My friends who are stay-at-home parents are, for the most part, incredibly grateful. In a tough economy and with the cost of raising children heading ever higher, they know that being able to devote their full-time attention to their kids is a luxury many can't afford.

Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

At the same time, most will readily acknowledge that their decision to stay home hasn't come without sacrifices. They might miss the work itself as well as the adult company that is usually part and parcel of working outside the home. (One of my friends said she knew she needed to get out more when she found herself grilling her husband not just on what he had ordered for lunch that day, but on what each of his colleagues had ordered, as well.)

Nonworking spouses usually also sacrifice on a financial basis, and not just in terms of forgone compensation. They can't contribute to company retirement plans, and their Social Security benefits may also be less than if they had continued working.

But just because a spouse has pressed pause on his or her career, or hung up the workaday life altogether, that doesn't mean that financial-planning considerations have to go by the wayside. Although some single-earner couples may find themselves strapped financially, they will find it worthwhile to strategize about steps they can take to ensure the family's financial well-being later in life, not just in the here and now.

If you have a nonworking spouse, or are one yourself, here are some key steps to take.

Don't Give Short Shrift to Retirement Planning
Even though one partner may not be employed outside the home, and therefore is ineligible to contribute to a company retirement plan, that doesn't mean that retirement savings have to go by the wayside.

The working spouse should contribute to his or her company retirement plan at the highest level the household can afford, provided the plan is decent. In addition, married couples who file a joint tax return can contribute to an IRA for the nonworking spouse, as long as the working spouse has enough earned income to cover the amount of the contribution. Beyond that requirement, much about the spousal IRA is the same as any other IRA. The contribution limit is $5,000 for individuals under 50 and $6,000 for the 50-plus set, and you can fund a Roth version or traditional IRA. The Roth is preferable in many situations in that it allows for tax-free withdrawals in retirement. But if your spouse is not contributing to a retirement plan at work or your household income falls below a certain threshold, your contribution to a traditional spousal IRA may be tax-deductible.

Note that if the nonworking spouse heads back to work at some point, that spouse can continue to contribute to the IRA using his or her own income to cover contributions.

Get a Backup Plan
I've been using "nonworking spouse" in the course of this article, but in the vast majority of cases that's a misnomer. Many nonworking spouses handle child-care or elder-care duties that are of critical importance to the family. And should that nonworking partner become disabled or die, hiring an outside provider to pick up those responsibilities would be costly indeed.

Unfortunately, it's impossible to buy disability insurance if you have no earned income of your own; after all, the point of the coverage is to replace your income if it's disrupted because of a disability. You can and should, however, purchase life insurance for a nonworking spouse, particularly if that spouse's passing would result in significant financial hardships in the household.

Get Strategic About Social Security
While out of the workforce, a stay-at-home spouse doesn't earn Social Security credits. At retirement, that spouse is eligible to take a Social Security benefit based on his or her own work history or up to 50% of the spouse's benefit.

But it's also possible for couples to mix and match benefits, thereby optimizing their total Social Security payouts over both lifetimes. Such strategies tend to be particularly beneficial in cases where one spouse has had a much higher income than the other. For example, the lower-earning spouse can begin collecting benefits before the higher-earning one, thereby entitling the higher earner to spousal benefits early on in retirement. Later in life, the higher-earning spouse can claim his own benefit (at a higher level) and dump the spousal benefit, which has the valuable side effect of increasing the benefit available to his wife upon his death, assuming he predeceases her. This article details some of the most common and effective Social Security strategies for married couples.

See More Articles by Christine Benz

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