Preparing for the Financial Impact of Maternity Leave
If you work for an American company, typically some or all of your maternity leave will be unpaid, leaving you the options of using vacation time, taking less time off or simply not being paid for the duration of your leave. Some companies require that you use a portion of your vacation time, but others do not. If you have short-term disability insurance, you will likely receive a portion of your pay while you are on leave. However, most of these policies are pretty vague, and your Human Resources representative may not know the full details off hand. Here are three financial considerations when preparing for maternity leave:
1. Know your benefits.
If you have a disability policy, get familiar with the details. The policy language may be vague or confusing. It may say something to the effect of “60 percent of pay up to 12 weeks”—leading you to believe you will receive 60 percent of pay for 12 weeks, when that is not the case. Prior to your due date, make sure you understand the full details. In my experience, a birth qualifies for 60 percent of pay for six to eight weeks (six weeks for a traditional birth, eight weeks for c-section/additional complications). There is also a one- to two-week waiting period, meaning your actual pay period may only include four to six weeks. If your employer pays the premiums for this disability policy, you may be taxed on the benefits you receive, so plan on withholding about 30 percent of what you receive for taxes. Additionally, you may need to reimburse your employer if they paid your portion of health insurance premiums (if the policy is through your employer) while you were on leave.
Before your maternity leave, discuss the details with your manager to determine whether you can continue to pay these premiums during your leave, or whether they will need to be reimbursed upon your return. There is also typically a maximum amount you can receive per week, so if you are accustomed to a higher salary, this may be an additional reduction. After all of these things are considered, you may only receive the equivalent of one or two net paychecks during that 12-week time period.
2. Plan ahead.
Having a baby is expensive, but information is available to help you plan ahead for the expenses. Take stock of all of the big ticket items you may need to purchase like a crib, stroller, car seat, etc. Create a spending plan to purchase these items prior to your maternity leave. A couple of weeks after the baby is born, bills may begin rolling in from all directions. You should expect invoices from the hospital, your doctor, the child’s pediatrician, the anesthesiologist (if you received an epidural) and any specialists. If you have a high deductible health plan and have not met your deductible for the year, you may be paying full freight for these services until your deductible is met. If you have a Health Savings Account (HSA) or Flexible Spending Account (FSA) associated with your health care coverage, you may be able to use funds accumulated in these accounts to pay medical bills. Don’t be afraid to ask your health providers about expected charges so you can plan ahead. You also may need to secure a daycare provider well in advance of the birth, which may require a deposit. Also, your baby may decide to come early or there may be complications. Either of these situations may mean extended hospital stays, requiring more time away from work. I advise moms to consider building an emergency fund for these types of unexpected expenses.
3. Understand the impact on your future income.
When you announced you were expecting, did your work flow change? Maybe you are not working on important projects or the most profitable cases anymore. If you are paid hourly, paid through commissions, have a heavy appointment schedule or are expected to travel, your income may be impacted upon your return. Will you continue to work full time when you return? If not, what does your new role look like? Be sure to have an honest conversation with your employer about this. If they fear that you will not return, you may not be considered for bonuses, an annual pay increase or additional responsibilities.
If you plan to breast-feed after returning to work, you will need to reserve time for pumping. How does this affect your work load? If your infant is exclusively breast-fed, you may need to pump up to three times during the workday to maintain your milk supply. This will eat up roughly one-and-a-half hours of your day (five minutes to get set up, 15 minutes of pump time and five minutes of cleanup). How does this work with your current schedule? The key here is communication. Be open and clear with your managers and co-workers about what you expect when you return to work and understand what is expected of you.
When you return to work, the clothes you used to wear likely will not fit. If you have a role where you need to dress professionally, you may need to invest in some new clothes. It seems to take nine to 12 months to return to “normal” size or to reach your “new normal” size after having a baby. Plus, if you are breast-feeding, you will want to wear clothes that allow for easy access so you do not have to completely disrobe at every pump break (i.e., no more side-zip dresses). Expect that you will need to go shopping and budget accordingly. If your income is based on production, sales or commission, you may need to account for some ramp-up time before you receive your new paychecks upon your return. Adding to your family also means you may need to consider risk management programs like life insurance and estate planning. You may need to purchase additional coverage or draft/update your will to ensure your family is protected.
Taking a leave of absence from work can cause stress in your household if you are unprepared. Consider the issues above so you are not caught off guard by financial concerns. This way, you can spend your time worrying about your sweet little newborn instead of your finances.
Jamie Bosse, CFP, RFC, is a mother of two and a financial planner at KHC Wealth Management. Jamie loves to write, travel, barbecue, watch the Kansas State Wildcats win football games and spend time with her husband, sons and pet corgi. She is an active member of the Financial Planning Association of Greater Kansas City.