Having your first child is a life-changing event. Suddenly you’re responsible for another person’s well-being and that can prompt major lifestyle changes — including the decision for one parent to stay home full-time.
For many families, the financial strain of child care forces this decision to the forefront. For many Canadian families the cost of child care means one person must stay home, while the other continues to earn. But what if child care costs are not an issue? And what if one parent simply wants to be home with the child during those early years? And what if, as a couple, you can work it out financially — as long as you are both committed to making a few sacrifices?
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For instance, let’s assume you and your spouse are in your mid-30s and evaluating who should leave their job to become a stay-at-home parent (with the aim of that spouse being at home until the child enters preschool). To make it work, the full-time stay-at-home parent could consider temporarily reducing their registered retirement saving plan (RRSP) contribution. In the first year, this may mean cutting the contribution from 15% of their annual salary to 6% — enough to get their full company match and end up with a surplus of $350 each month. The other option is to pause the RRSP contributions entirely and have $700 in the budget, each month.
To make this decision the couple would need to consider other factors, as well. For instance, how much they currently have saved. In this hypothetical situation (that’s based on the scenarios faced by real Canadians), let’s say the couple has $150,000 in liquid assets and $300,000 in retirement savings between them. In otherwords, they’re in a solid financial position, but they’re still asking the right question: Can we afford to have one parent stay at home?
Consider the impact on your retirement savings
So the good news is that the disciplined savings prior to the birth of their child means that this family has savings well above the norm for their age group. According to data from Statistics Canada, the average Canadian aged 35 to 44 has $94,800 in their employer-sponsored registered pension plan (RPP) and a further $33,000 in RRSPs (1). While they are ahead of the curve, do they have enough to pause or reduce contributions?
To answer that question, it’s good to look at extreme situations. For instance, let’s assume that from this day forward they never contributed another dollar to retirement (not a good idea, but let’s look at the numbers). Now, let’s assume the existing $300,000 this couple has already saved grows at an anuualized 8% rate of return for 30 years. Based on these calculations, they’d end up with more than $3.3 million in retirement. That’s enough to generate about $132,000 per year in retirement income using the 4% rule — which says if you withdraw 4% of your retirement in the first year and adjust for inflation after that, your retirement savings should last 30 years.
Based on this extreme baseline, this couple wants to know: Would it make a difference to stop contributing to RRSPs for four years?
The answer is clear: It will make a difference, but not a catastrophic impact.
Here’s how we can tell. Let’s assume the partner who continues to work earns between $80,000 to $100,000 per year. Dropping RRSP contributions to 6% would mean forgoing approximately $30,000 to $40,000 in retirement savings over four years — money that, by retirement age, would have likely grow into hundreds of thousands. The impact means the couple is foregoing a sizeable amount (through savings, earnings and compound interest), but missing out on this sum does not derail them from a comfortable retirement.
Given the strong savings habit this couple displayed prior to welcoming their child, there’s a good chance they’ll ramp up on the contributions in later years, making up for any lost savings. One important distinction to note is that this couple can maximize their company matching program when it comes to RRSP savings — free money they should not ignore, which is why they should continue to contribute enough to maximize the employee top-up on the RPP.
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What else to consider when weighing one parent staying home
Money for retirement might be the most obvious factor when deciding whether it’s afford to have one parent stay home, but there are other factors to consider:
Average cost of child care
According to data from Statistics Canada, the average family paid $9,616 per year for full-time child care for one child under the age of five in 2022 (2). This data excludes Quebec, where child care is heavily subsidized. If your family needs to pay for care, this should be on the top of your mind. Depending on the number of children and the average salary of the stay-at-home parent, you might actually save money by having one parent stay home.
Career stagnation
The stay-at-home parent doesn’t just lose their salary; they also miss out on cost-of-living wage increases, promotions and, in some fields, industry changes that make it harder to return to the workforce.
This couple may be in the newborn trenches right now, but as their child grows and gets into a routine, the stay-at-home parent may find there is more free time. During those moments, it may be a good idea for the stay-at-home parent to consider how to reintegrate into the workforce, either through school or course enrollment or job training. This could set them up for better earnings and the family with even better financial security when it comes time for them to go back to work.
Retirement accounts for the stay-at-home parent
Not working often means you aren’t contributing to your retirement accounts, which can have a long-term impact on retirement savings growth. To offset this, the working partner can contribute to a spousal RRSP — this helps boost the stay-at-home parent’s retirement savings and offers tax incentive to the working spouse. Speak to a financial advisor about it to see if this is the right step for you to take.
Mental health impacts
Some parents thrive at home with a young child, but others struggle with isolation or the lack of adult interactions — and you might not know which camp you fall into until you take the leap. To counteract the negative aspects, parents can sign up for parent-and-me activities, which may carry a cost that need to be factored into the family budget. To overcome these hurdles, each partner needs to have an honest conversation about expectations, division of labour and adjustments you can make to preserve both parents’ mental health.
Ultimately, having one parent stay at home can work. If you’re considering a similar move, be intentional. Cut back on excessive spending, make sure to contribute enough to retirement to get the company match and prioritize anything you can do to boost long-term savings. With a solid plan and clear communication, this could be a rewarding choice for your family, both financially and personally.
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Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Statistics Canada: Assets and debts held by economic family type, by age group, Canada, provinces and selected census metropolitan areas (1); Statistics Canada: Estimates of parental child care expenses in January to February 2022 (2)
This article originally appeared on Money.ca under the title: Is it wise to cut your RRSP contributions after having a newborn? Here’s what you should consider
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.