Whether it’s to stay in school longer to earn a higher degree, become more established in a career, or not wanting to settle down until later in life, there is a growing trend to have children later on. In addition, the traditional two parent married couple has become, well, less traditional than ever. I have many friends who have become parents recently, but their families all look a little different. Parents can be married, unmarried or single. No matter what the parental unit looks like, they are now all faced with the same issues. I started to think about the shift they must be experiencing in how they view their finances. For years, they have been concentrating on their developing careers and saving for retirement, and along comes this new little person in their lives that needs to be considered.
So what comes along with this new chapter of life?
Well, first decisions must be made on childcare. If there are two parents, will one reduce or stop working to stay home and care for the baby? Will both continue their current work schedules while the baby goes to daycare? Will they hire someone like a nanny to care for the baby at home? Then there’s the question of finances. Where will the extra money come from to pay for diapers, formula, clothing and childcare? Will money they’ve been saving for their retirement need to be reallocated to current needs and expenses? Once these essential decisions have been made, it’s time for three other important pieces to address: estate planning documents, life insurance and 529 college savings plans.
Estate Planning Documents
Estate planning documents include wills, durable powers of attorney (for both financial and health care), living wills, and, in some instances, trusts. These are all instruments most attorneys recommend you have even in the absence of children as the foundation of any good financial plan, but the addition of a child brings new concerns. You need to name a guardian for your child or children in the event of the death of a single parent (or both parents if a couple). Naming a guardian ensures that your child will be cared for by the person(s) of your choice and does not leave that decision to the courts. The guardian chosen will hopefully be one that practices their own fiscal responsibility and will pass that same valuable prudence on when caring for your child. This is obviously not a decision that parents make lightly, and they should have the permission and agreement of the guardian before naming them in their will. Your will should also outline how your estate will be handled in the event of your death. Will your child or children inherit it outright? Will the money be placed in trust for their benefit? These are a few of the areas to be addressed with an attorney to ensure your wishes for your child are properly carried out.
There are multiple uses for life insurance, but within the scope of this blog we will concentrate on what life insurance provides for your children. It goes without saying that your child will suffer a tremendous loss at your death emotionally, but monetarily you also must imagine the costs associated with caring for that child if you are no longer around to provide for them. Life insurance may be needed to pay off or continue paying a mortgage to provide a home for the child. The child’s day to day expenses will need to be considered, and lastly, most parents want to provide a life insurance benefit so that their child can still attend college and get an education. I recommend consulting a licensed insurance agent in order to see exactly how much life insurance is right for you and your family with those three objectives in mind. At present, term life insurance is the most cost effective way to attain this coverage.
529 College Savings Plans
The 529 College Savings Plan is a vehicle in which you can set aside and invest money for your child’s future college tuition and expenses. The plan is allowed to grow tax deferred and is also withdrawn tax free when used to pay qualified education expenses. Deposits may be made all at once in accordance with maximum contribution limits or sporadically over time. While each state offers their own plan (some more than one) participant’s choices of plan are not limited to their state of residence. So even if you live in RI, you can still use the Utah 529 Savings Plan or the Michigan Education Savings Program and vice versa. Many states do, however, offer a tax deduction for using your resident state’s plan, so it should be taken into consideration when choosing which plan to use.
Why wouldn’t you use your state’s plan?
There could be a number of reasons. Within the plans you must choose your investments, and many plans use mutual funds from well-known companies such as Vanguard, AllianceBernstein, Fidelity and more. You should choose a plan which offers low cost investment choices and provides decent fund performance. Sometimes the benefits of the tax deduction for using your state’s plan are not great enough to outweigh using that plan if it has higher fund costs and/or poorly performing funds. Like most investments, especially those which are tax deferred, there are IRS rules and regulations that govern the withdrawal of funds. There is a 10% penalty on earnings if the funds withdrawn are not used for education expenses. The plans do offer benefits such as transferability to another family member in the event that the proposed beneficiary does not use the funds. Another valuable aspect of these plans is that they provide family members like grandparents, aunts and uncles, and others an outlet for giving monetary gifts to the child over the years that they can feel good about knowing they helped contribute to their education. Even if you as a parent are currently unable to put a lot into the plans, others may be willing to contribute.
Addressing these issues is never easy. No one wants to think about the scenarios in which most of them come into play. However, knowing that you have taken care of them will provide you peace of mind, so that you can think about other things, like whose turn it is to get up for the next feeding.
Chrissy Canapari, ChFC® serves as Financial Advisor and Manager of Client Services at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at firstname.lastname@example.org.
This original post was authored in 2013 and content has been updated, where necessary, to reflect current financial data. We encourage you to contact us if you have any specific questions about the content of this article. The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Chrissy’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.