By Claire Emory, CFP®, CFA, MBA Arlington, VA
Becoming a parent is one of those transitions that tend to make you step back and think of the big picture. It’s a chance to take stock and reassess your financial plan as you move into an exciting—and expensive— new phase of your life. Having a child not only shifts your emotional terrain, it alters the financial ground as well. The website http://www.Babycenter.com has an enlightening calculator that can give you a sense of how much it costs to raise a child in your region of the country, based on the range of your household income, whether you’re single or a co-parent, live in a metropolitan or rural area, and whether you plan to pay for college. For example, a couple living in a city in New England, with an annual income of $100,000 or higher and planning to pay for public college, will spend an average of $499,400 from birth to age 18, including $78,380 for public college. These figures are in 2010 dollars, adjusted for inflation, from the U.S. Department of Agriculture annual report “Expenditures on Children by Families.”
Seeing those average expense figures may prompt you to take a close look at your savings habits. If you run into bumps in the road ahead, which happens to most of us sooner or later, do you have adequate liquidity to make it through the rough patches smoothly? Are you saving automatically for retirement from each paycheck or regularly putting money into a retirement account if you’re self-employed? Your first thought, with regard to long-term savings, might be to worry about your child’s college education, but funding your own retirement must take priority. Most likely, you’ll be supporting yourself after you retire for far longer than your child will be in college, and you cannot take out a low-interest loan or qualify for a scholarship to fund your retirement years. If you’re already maximizing your retirement contributions, you can think about taking the next step and starting a college fund, preferably funded by automatic monthly transfers.
Now is also a good time to review your insurance coverage. None of us knows what the future may hold, and you want to be able to offer your child a financially secure upbringing no matter what happens. Do you have enough term life coverage to adequately replace your income, including paying for college if that’s a desired goal, if you were to die prematurely? Even more importantly, do you have sufficient disability coverage, preferably provided by or purchased through your employer? Losing income as a result of illness or injury is far more common than dying before retirement age and can compromise the lifestyle you hope to offer your child. According to the Social Security Administration, 3 of every 10 workers will become disabled at some point before reaching retirement. Most of those disabilities are due not to accidents but to relatively common chronic illnesses such as cancer, heart disease, and multiple sclerosis. Although a fair number of companies offer short-term disability coverage, not so many cover long-term disability. Social Security provides benefits to those who have been disabled for more than five months, whose disability is expected either to last a full year or end in death, and who are unable to work at any occupation. Multiple applications are usually required to qualify, and the benefits average around $1,000 per month. It’s worth checking with your employer to find out exactly what coverage is available to you, taking advantage of group coverage where possible and supplementing that with an individual policy if necessary to replace at least 60% of your income.
Even, or especially, in the midst of the joy of birth, the prospect of death cannot be ignored. This new being depends on you completely, and part of your obligation is to ensure that he or she would be well taken care of if something were to happen to you. An up-to-date will is essential, with a primary guardian and backup guardian designated. Keep in mind that if you’re married and your spouse dies without a will, you will not necessarily inherit all of the assets. Quite a few states have intestacy laws that divide the assets between the surviving spouse and any children of the marriage. Assets left to a minor child are then administered by a court-appointed guardian under court supervision until the child reaches age 18 or 21, depending on the state.
Choosing a guardian is often a difficult task for parents and easy to put off. Ask yourself: Who would you prefer make the decision of who would raise your child if you were to die prematurely, yourself or whichever judge happens to get the case if you die without having designated a guardian? Yes, it’s a hard decision, but you’ll feel much better once you’ve made it. If you don’t have family or aren’t comfortable designating a family member, think about who would be likely to raise your child with the values and lifestyle most congruent with your own. And keep in mind that the designation isn’t etched in stone for the next 18 years: you can revise it later if circumstances change.
Don’t forget that your new little bundle needs a Social Security number. If you didn’t deliver in a hospital or weren’t given a form after the birth, contact your local Social Security Administration office. A Social Security number is needed to claim child-related tax breaks, to add your baby to your health insurance plan, to set up a college savings plan for the little one, and for various other purposes. Once you know you have all your financial ducks in a row, you can focus on making the most of your new expanded family life.