Financial advice for working mothers
Suncorp's Sarina Raffo says working mums represent a potentially large client segment for planners and outlines the areas where they need financial advice.
Women are more likely to seek professional financial advice on money matters, compared to men1.
While financial advisers may not need to work as hard to get female clients in the door, a customised approach should be taken to cater for their particular needs – especially women with children who are returning to work.
Relevant financial advice for working mums includes:
- Strategies to counteract the reduction in retirement savings during maternity leave (the ‘super baby debt’);
- Availability of Government assistance during maternity leave and after returning to work; and
- Changing insurance requirements.
Let’s discuss each area of advice further below.
Super baby debt
What is not commonly discussed by advisers is how maternity leave may compromise a woman’s retirement savings.
As we know, due to compounding, investments at an early age are much more powerful than investments at a later age.
Unfortunately, this works inversely as well – ie, the absence of investment at an early age has a much greater effect compared to absence of investment at a later age.
Therefore, mothers who cease making superannuation contributions during maternity leave for several years in their 30s may be much more adversely affected than anticipated.
A recent Suncorp/Association of Superannuation Funds of Australia survey2 found that having a family can create a ‘super baby debt’ for mothers of up to $50,000 by the time they reach retirement.
The debt occurs when women suspend their normal superannuation contributions when they take two or more years out of the workforce to have children.
The solution advisers can offer their clients is to adopt the ‘1 per cent rule’ – which is simply to add 1 per cent to their super contributions until retirement.
It should be noted that the government parental paid leave scheme does not provide for Superannuation Guarantee (SG) payments.
Some employers do offer paid parental leave; however they may not include super contributions as part of the package.
Employers are not under a legal obligation to make SG contributions when their employee is on maternity leave.
Case study
Andrea, age 30, is about to go on maternity leave, with the birth of her first child due in three weeks. She plans to have two children, approximately two years apart.
Andrea is aware that her SG contributions will cease during maternity leave; however she is unsure how it will impact her retirement savings.
Her employer allows her the option to take up to 12 months maternity leave per child. She would like to spend as much time as possible at home with each child before returning to work.
Andrea approaches her adviser to discuss what her options are. Andrea's current salary is $62,000 and her super balance is $25,000.
If Andrea has two children, she would be out of the workforce at age 30 and 32.
Not only would her employer cease making SG contributions during this time, there would be fewer working years to regain lost retirement savings.
Graph 1 shows the reduction to Andrea's retirement savings due to two years out of the workforce.
Andrea’s super baby debt would be just over $26,000 (current dollars). However, salary sacrifice contributions of only 1 per cent of income would return her retirement savings to more than their original level.
While the above case study illustrates how to return retirement savings to better than normal levels after maternity leave, there is no reason to wait until pregnancy to make additional contributions into super.
The greater number of working years, the lower percentage of income an individual needs to contribute each year.
Therefore, if a female client is intending to start a family in five years time, it makes sense to start contributing now, rather than waiting until they return to work after maternity leave.
Government maternity and child care assistance
Generally, both parents need to be working full-time these days to cover the mortgage and everyday expenses.
Therefore, it is necessary for an adviser to be aware of the types of government payments that are available for families – not only during parental leave, but also when the mother returns to work.
Paid parental leave payments v baby bonus
The main differences between paid parental leave payments and the baby bonus are shown in Table 1.
The Department of Human Services provides a calculator that determines the best option for each client.
Child Care Benefit and rebate
The Child Care Benefit helps cover the cost of child care for low- to middle-income families. The amount of Child Care Benefit payable depends on family income.
The maximum rate of Child Care Benefit is payable where family income is less than $41,026 per annum.
If family income exceeds the upper threshold (eg, $142,426 for a family with one child), no Child Care Benefit is payable.
Therefore, it is common for a two-income household to exceed the upper threshold.
However, the Child Care Rebate can be received by higher-income families if they apply for the Child Care Benefit under the zero rate.
The Child Care Rebate is paid in addition to the Child Care Benefit and subsidises approved out-of-pocket child care costs by 50 per cent, up to a limit of $7,500 per annum.
Example
Asha and Zach both work full-time and earn $120,000 and $80,000 per annum respectively.
Henry, their three-year-old son, attends approved day care three days a week (7 hours per day).
The cost is $80 per day. Although their family income is above $142,426, they can still receive a rebate of $40 per day (this can be paid directly to their day care provider, resulting in a reduction in fees), if they apply under the zero rate for the Child Care Benefit.
They are within the annual limit of $7,500 as the total rebate for the year = $40 x 3 days per week x 48 weeks* = $5,760.
* Henry’s day care is open for 48 weeks each year.
Changing insurance needs
It makes sense that regular insurance reviews continue to be part of the overall financial advice process for working mums.
The calculation of the sum insured for term life, TPD and trauma is subjective and depends on factors such as the benefit design of the cover provided under the policy in question.
This means that for some policies it is possible for the sum insured to reduce on the expectation that some assets can be accessed (and are fairly liquid) upon death or disability.
An example of a calculation for a sum insured that reduces in this way is shown in Table 2.
You will note that the sum insured is reduced by the superannuation balance as it is assumed that if the client dies or is disabled, super will become accessible.
This is not always true; however, it is a fair assumption for the purposes of determining the sum insured by the adviser.
This assumes that the sum insured is designed to take into account the fact that a superannuation benefit will increase over time and become payable upon death or disability.
In addition to changing personal insurance needs, there may be additional cover required for the children.
While this may be a difficult conversation to have with parents, some insurance providers offer free kids cover (up to a limit) that can be used as the conversation starter.
Although the conversation is uncomfortable, most of us would agree that we don’t want to be working if one of our children became seriously ill.
Conclusion
Advisers looking to tap into this particular market should be aware of what advice gaps exist for working mums.
Once these advice gaps have been identified, it is a fairly easy process to incorporate a tailored solution into the overall financial plan.
1 Citibank City Fin-Q survey 2008.
2 Suncorp-ASFA Superannuation Attitudes Survey 2012.
Sarina Raffo is the technical services consultant at Suncorp Life.
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