Tuesday, May 8, 2007

To stay at home, or to return to work?

One decision that has been on my mind since I first learned I was pregnant is whether to return to work after my maternity leave, or to stay at home with the kid(s).

Many of the moms I talk to run the numbers and decide that the costs of working and daycare leave them with so little take-home pay that it's not worth it to return to the workforce. I realized today though that they're probably underestimating the impact on their lifetime earnings of being a stay-at-home mom.

While it's useful to consider the extra costs of going to work and crunch the numbers to see how much 'extra' money you'll be left with at the end, I think that this method might skew the numbers in favour of staying home in most cases, but it doesn't consider one very important factor: the anticipated increase in earnings that most of us can expect over time if we continue in the workforce.

It is true that a working parent's take-home pay takes a hit from daycare costs, and that there are many other 'hidden' costs of working such as transportation, eating out more frequently, the need to maintain a professional wardrobe, and so on. But even if those costs eat up a large chunk of your take-home salary today, by choosing not to return to work, parents risk losing out on significant increases in salary over time. Just how much depends on your age and current earning power.

Take a look at VisualCalculator's Income Growth calculator (you'll need to scroll down and look for it under 'Income & Insurance Suite') to see what I mean.

Even assuming a yearly salary increase of only 3%, opting out of working for 10 years (say until two kids, three years apart, are both in school) makes a big difference. Depending on your age, type of job and potential for career advancement, the loss could be much heavier.

For me, just a year of maternity leave drops my estimated annual income at retirement by $6,000 (I'm assuming only a 3% annual increase). Were I to take 10 years off, assuming I was able to re-enter the workforce at the same salary I have today (far from certain), I'd see a drop of over $50,000, and a drop in total income earned of $2.5 million over my working life.

According to the 'cost of raising kids' calculator, it's only going to cost me about a half million to raise two kids and my stepson to age 18. While clothes, lunches, transportation and daycare do add up over that time frame, I don't think it'll total $2.5 million.

And, of course, none of this includes annual bonuses, employer benefits, employer matching of retirement savings and company stock purchases, stock options, or, most importantly, future raises. I'm only 25, and I've doubled my earning power in the last three years through switching jobs and lobbying for a raise. While I can't expect that pace to continue, I think there are pretty good odds that I'll be able to boost my annual earnings over the next 40 years by a lot more than 3%. It also doesn't factor in any potential investments/savings allocations that would be put on hold during the time when one parent stays home, or the impact of forgoing extra mortgage payments etc. during those lean years.

Obviously there's a lot to consider, and the decision shouldn't just be an economic one. But since so many people are using income calculations to justify a choice to stay home, I think it's worth it to consider this angle as well.

Thanks to J.D. at Get Rich Slowly for pointing to the visual calculator resource page.

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