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Liz Pulliam Weston is a personal finance columnist for MSN Money and author of the question-and-answer column “Money Talk,” which appears in newspapers throughout the country. She is the author of several books, including Easy Money: How to Simplify Your Finances and Get What You Want Out of Life, Deal with Your Debt and Your Credit Score: How to Fix, Protect and Improve the 3-Digit Number that Shapes Your Financial Future. Liz has much more fantastic financial information for you at her website AskLizWeston.com. Jon Gallo co-authored — with his wife, Eileen — the books The Financially Intelligent Parent: 8 Steps to Raising Successful, Generous, Responsible Children and Silver Spoon Kids: How Successful Parents Raise Responsible Children. He is an attorney who specializes in Probate, Estate Planning and Trust Law. Ginita Wall is a CPA, Certified Financial Planner and Certified Divorce Specialist. She’s written or co-written several books, including It’s More Than Your Money, It’s your Life!: The New Money Club For Women, The Way To Save, Our Money Our Selves: The Guide for Women at Financial Crossroads. She co-founded the Women’s Institute for Financial Education.
Welcome to your Pea in the Podcast. I’m Bonnie Petrie with everything you need to know about your body, your baby and the big changes ahead in your life in your journey to becoming a mommy.
This week, we’re getting your finances in order. From insurance…
“You may need insurance for the very first time, and we’re talking about life insurance here.”
To your taxes…
“When baby makes three, you have now the new exemption for the child and you may have the child tax credit.”
And estate planning…
“If you’re a single person, you can certainly be fancy-free about whether you want to have a will or not, but if you’ve got a kid, you’ve got more of a responsibility.”
Sound overwhelming? Don’t worry, mommy, we’ve got three great money experts to talk you through it. We’re doing our financial planning for parents-to-be in this Pea in the Podcast.
Up until now, the extent of your financial planning may have included planning to e-file your EZ tax form every April. Well, mommy, times they are a-changing! You’ve got a little one to think about now, and raising that little one to the age of 17 could cost you more than a quarter million bucks. We’ve talked to author and MSN Money expert Liz Pulliam Weston to get you started, CPA and Certified Financial Planner Ginita Wall talks taxes for you, and Attorney Jon Gallo helps you plan for what will happen should something happen to you.
Believe it or not, the very first thing you need to think about has little to do with money. Attorney and Estate Planner John Gallo says it is all about power of attorney.
“Well, whenever you are going to be in any kind of a hospital situation, which obviously is the situation here, you want to make sure that you have adequately documented your healthcare powers of attorney. It’s really not a financial issue, it’s a healthcare issue. You want to make certain that you have given your spouse or your partner a power of attorney for healthcare so that they can make healthcare decisions for you if that becomes necessary. And that’s particularly important for couples that are not married to one another and who are not registered domestic partners in the state which allows domestic partner registration because usually in those situations, the other parent is viewed by the hospital as a stranger and really has no right to visit and certainly no right to make healthcare decisions. So it’s really important that you have a completed healthcare power of attorney on file with your doctor and on file with the hospital.”
So you want to get those documents in order first, then you can start thinking about money. MSN Money expert Liz Pulliam Weston says insurance comes first.
“Now we’re talking about life insurance here. When it’s just you and your husband, a lot of couples could actually get by without the other person’s salary so they don’t necessarily need life insurance or don’t need that much. Once you have a child, the equation totally changes. Now you need probably at least 5 times your salary and possibly as much as 10 times of your salary to get a child through their childhood and through college, you know, if something should happen to you. So suddenly life insurance goes from something that’s a nice thing to have to something that’s an essential thing to have.”
Weston says you need to figure out just how much you need before you put yourself at the mercy of someone in insurance sales.
“You don’t want to just stumble in to a life insurance agent and say, ‘sell me insurance’ because a lot of times what people get sold are very expensive so-called ‘cash value’ policies and they may have their benefits, but the problem is, they’re usually so expensive that you wind up getting less coverage than you need. So the first thing you need to do, before you talk to anyone, is try to figure out exactly how much insurance you should be buying and, like I said, there’s a guideline of 5 to 10 times salary, but it’s better to go online and actually find out how much you need.”
At MSN.com there is a life insurance needs calculator for you. Weston says you can also find chapters on life insurance in many personal finance books, but she says you’d probably do just fine with term insurance.
Well, what is term insurance?
“It means that you are insured for a term of time, a period of time. And for most families, you’re going to want 20 or 30 year what’s called ‘level term’ insurance. In other words you pay the same amount every year, you’re covered for 20-30 years and that’s the period when most families need coverage. After 20-30 years, the kids will be out of college, you should have some savings and retirement investments and accounts built up and your need for life insurance either goes away or is greatly diminished at that point.”
This is important for everyone, but particularly important if you are a single parent, and if you don’t have it now, you’ll need health insurance.
“Close to 46 million Americans now are uninsured and probably 16-17 million more are what’s called under-insured. They have health insurance, but it wouldn’t protect them in a real catastrophe. Either they have very large deductibles, like 30% deductibles, or the cap on their insurance is so low that one accident or even one visit to the emergency room could blow out their insurance and they wouldn’t be covered. So what you need ideally to have is a health insurance policy that, even if you have to pay a certain amount upfront, will cover you in the big disasters and I like to see policies with at least a million dollars worth of lifetime coverage, if not more. And if you have no coverage at all, then you need to be looking for a job that offers it, frankly, or go out there in the marketplace and try to buy an individual policy. That’s really tough, you have to be in perfect health, everybody has to be pretty much in good shape and the younger you are, the cheaper it will be, but you don’t want to go without health insurance. It’s just too big of a risk, it’s one accident or illness away from bankruptcy essentially.”
Yeah, insurance in America is expensive right now. If you don’t have a policy, how do you afford one?
“I don’t know that any of them are cheap, but the way to keep costs down if you are basically healthy is to look into what’s called a ‘high-deductible’ or ‘catastrophic’ policy. That’s where you pay the first 1000, 2000, or even 5000 dollars out of pocket, and then you have a monthly premium payment to cover you against catastrophes. In that case, you know, you wind up paying more for your routine doctor visits, you know, or the occasional run to the ER or whatever, but you’re protected against the really big expenses that could wipe you out.”
Many states have health insurance programs for kids if you find yourself stuck. Some even have programs for low-income adults, but as Weston said, skipping it is a very bad idea. A couple she knew did just that.
“They were self-employed, they had their own business, they looked at what the premiums would be and said, you know, we just can’t afford that. Well, he started developing heart trouble. He went to an ER and they said, you know, we think something’s wrong, but you really need to go to a specialist. And they put it off because they didn’t have coverage, and she woke up one morning a widow. And she was in her mid-40s and they had 3 kids. And that’s not anything like the life that she had planned for herself, but that is what happened because you can never predict what is going to happen, you know you can’t predict what is going to happen to your health or if somebody will get in an accident. That’s why it’s so important to buy some coverage and make sure that you have it, and it’s really tough. I know it’s expensive and a lot of jobs don’t offer it, but it is something you know that everybody should try to get.”
Another thing that Weston — and almost every other money expert in the land — stresses is the important of saving for retirement ahead of everything else you might save for.
“The reality is that Social Security is going to change, there’s no way that it can stay the way it is because we’ve already promised more benefits than we can cough up. So it’s definitely going to change. I don’t think it is going to go away, but I don’t think that the benefits are going to be as generous. At the same time, fewer and fewer companies are offering the old, traditional pensions that pay you a set amount in retirement. So it really is up to us. We really do need to start saving as early as possible, and we need to not stop. And that’s the thing, a lot of people say, ‘well my budget’s tight, I’m going to decrease or not contribute to retirement.’ That’s exactly the wrong way to think about it. Retirement has to be a built-in part of your budget unless you want to work until you’re 90. Nobody wants to do that or very few people want to do that. So whatever you have to cut to put that money aside, you need to start doing it and make it a priority even over saving for your child’s college education and that’s hard for parents to hear because they want to give their kids the best that they can. But no one is going to loan you money for your retirement, your kids can borrow money for school.”
She says it doesn’t matter where you are in life, start saving right now.
“If you have a 401K at work, that’s the best place to get started because most workplace retirement plans offer a company match, and that’s essentially free money. So the goal, if you have a 401K, is to contribute at least enough to get the full company match. In a lot of cases, that’s going to be 5 or 6% of your salary. And then every time you get a raise, put the raise money in. So if you get a 3% raise, jack up your 401K by 3% and people find that very hard to do because they want to spend that raise, but really this is a pretty painless way to get your retirement savings up to where it should be because, unfortunately it needs to be 10-15% of your salary. It needs to be going to retirement and that is scary to a lot of people and painful, but wherever you get started is going to be fine.”
If you don’t have a 401K at work, you can save on your own. Weston says get an IRA or a Roth IRA, you can get one started at any brokerage house or bank.
“And you want to look for basically putting most of your money into stock mutual funds or stock index mutual funds, and those basically are invested in stocks so they are going to be going up and down over time, but only stocks gives us the kinds of returns we need to beat inflation and to actually give us the kind of growth that we need to retire. And if this all is Greek to you, you can just run down to a local library or bookstore and grab a book like Personal Finance for Dummies. It’s a great book, it explains how all this stuff works and it can get you started.”
If thinking about all of the money you now have to set aside for insurance and retirement is stressing you out, breathe. There are a few breaks for you on the horizon. Tax breaks, anyway.
“You’re still probably going to be filing a joint return with your spouse. If you are not married, then you may be filing as head of household since you’ll have a child in your home and that is a better filing rate than single is. So you’ll be saving some money right there.”
Ginita Wall is a CPA and a Certified Financial Planner and she says baby will improve your financial picture taxwise.
“There are several things that you get for having a child, besides the wonderful experience of being a mom. One of those is that the child is entitled to a personal exemption. In addition to that, if your income is below a certain amount, you get a child tax credit for each child. That’s the law through 2010, and it may be extended. Your income has to below $110,000 for joint filers or $75,000 if you are single. And beyond that the $1,000 per child is reduced by a certain amount.”
There is another expense to consider, the pain of which can be eased somewhat by a couple of tax options: childcare. Here is Liz Pulliam Weston…
“Oh, it’s an enormous expense and, you know, everybody ideally would like to have Mary Poppins full-time taking care of their child if they have to work, but that’s incredibly expensive, you know, even in parts of the country where childcare isn’t a huge hit, it’s still going to be more expensive to pay for a nanny. And then you have to worry about taxes and payroll taxes, withholding, making sure your nanny is legal, all of these other things so for a lot of people they are looking at a more group childcare kind of expense. And obviously as a parent, you want to have the best childcare you can possibly afford, but check out all the alternatives. I’ve talked to so many people who were paying a lot for childcare, weren’t happy with it, looked around and found out they could get a better situation for less money somewhere else. So don’t assume that, you know, just spending more money is the way to go. You really need to look at the available options. And you also need to look at whether staying home actually makes sense for you. If you’re not making a lot of money, you’re going to pay so much in childcare, in taxes, in commuting expenses that it may eat up most or all of your salary. And again on MSN there are calculators to help you look at a second income and see if it really makes sense.”
But if you crunch the numbers and staying home won’t work for you, you’ll have to pony up for good childcare, and Ginita Wall says the IRS acknowledges that.
“You do get another credit for that, a childcare credit, which is about $3,000 for one child or $6,000 for 2 or more children. So you get a credit for the childcare expenses that you pay up to that amount.”
There’s another option to offset the cost of childcare, you may have heard of it; it’s a flexible spending account.
“A flexible spending account allows you to take some of your salary, pre-tax, and put it away for certain things that you designate. You can put generally up to about $5,000 into the spending account and then you designate that you’re going to be spending that on medical or childcare or some combination of that. In general, it is a use it or lose it, so if you don’t spend the money by the end of the year or a certain period of time they give you after the end of the year, that money is gone even though it reduced your salary by that amount. Why would you do that? You would do that because you are saving the taxes so $5,000 could conceivably save you maybe $2,000 in income taxes.”
You can’t get savings from both the childcare credit and the flexible spending account, so which do you choose?
“The flexible spending is probably your best bet because you get to reduce your taxable income dollar for dollar, whereas with the childcare credit you get to claim about 20% of what you spend and that’s limited to just $3,000 per child.”
But Wall says if you invest in a flexible spending account and your childcare costs surpass $5,000, you can claim a credit for the amount over $5,000.
Liz Pulliam Weston, financial expert, says another consideration with tax implications is saving for your kids’ college education.
“You have to make sure that you’re saving enough for retirement first. And for a lot of families, they are going to have all they can do to do that and meet the daily needs and pay the mortgage and all of that, but if you have money leftover after you have taken care of your retirement savings, then you can look at college savings. And because of tax changes and other developments over the years, really one way to save has risen head and shoulders above the rest and those are the 529 college savings plans. They are offered by your state, every state has at least one and many have more than one. They are administered by mutual fund and pension companies and you put the money in and it grows over the years and you can pull it out and use it for college expenses absolutely tax free.”
Our tax expert Ginita Wall agrees, 529s are the way to go. If you can afford to make the investment, there really is no reason not to.
“What some people say is ‘what if my child grows up and joins the circus and doesn’t go to college?’ You can then designate that money to go for a different child. Or what if your child decides to grow up and get married to their high school boyfriend and start a family? That money can be designated for their children, your grandchildren. It’s hard to think that far in the future, but there are always those options. Let’s say that you decide, after putting the money into the 529 plan that this really isn’t working for you, you really need to take the money out, you have to pay tax on the money that you take out, but only the amount of income. So you can always get to your principal tax free, which is a wonderful benefit. So there’s really no downsides and a lot of upsides to the 529 plan.”
Wall says if you invest in a 529 when your child is born, it could reasonably quadruple by the time they are ready to go to school. That’s a good return, so start by Googling your state, and Wall says many states offer a tax credit or a deduction for the amount that you put into the plan, and grandparents can invest in one, too. In fact, grandparents can do quite a bit to ensure your child’s financial future.
“When your child is old enough to get their first job, perhaps you can get their grandparents to contribute to a Roth IRA in their name so that they can put up to the amount of their earnings, which is capped by that time probably at $5,000, into a Roth IRA, which will then grow for their own retirement. Also, grandparents can do the 529 plan contribution, so you might encourage your parents to give smaller gifts of toys and larger gifts that will help your child in the future.”
Ginita Wall has a lot more information for you at a website called Wife.org.
Okay, now that you know what you need as far as insurance goes, and what you need to set aside for retirement, that kind of thing, you need to know how to make sure it gets to your kids if something should happen to you. But attorney and Estate Planner John Gallo says even before that, you need to talk to your partner about guardians for your baby.
“You need to start thinking about who would be the people who the kids would live with if something happened to you. And you want to make certain that you name them in a legal document, it depends on which state you live in as to what legal document that ought to be. In most states it is a will; in some states you can actually sign a document that is a nomination of the guardian of your children that is separate from your will. And you need to go to a lawyer in your state and find out how do I document the appointment of the guardian.”
I know no one even wants to think about this, but you really have to. If you don’t, and something happens…
“The court is going to appoint somebody to take care of your kids, and usually it’s the person who comes forward. When my clients tell me they don’t know who to name as a guardian, my first question is if something happened to you who would come forward to take care of your kids if you were laid up in the hospital or if you passed away? And are those the people you would want to come forward and take care of your kids? Is it your husband’s parents? And are they maybe the last couple on earth you want to have be the guardians of your kids? So you really need to think long and hard about who the person is you’re going to nominate.”
As Gallo says, you can set your child’s guardian in your will. In fact, you can choose two — one to raise them, and one to manage their money until they are old enough to manage it themselves. If you have a home and investments, you will certainly need a will.
“Or what we call a revocable trust that is a will substitute that allows you to dispose of your property without having to go through probate. If you have a will, it’s got to go through the probate court and that is fairly expensive usually in most states. People who own homes quite often are going to use a trust arrangement in order to avoid probate and here again you have to start thinking about am I going to leave this outright to my children? If they are minors, who’s going to be their guardian? Am I going to leave it in trust for them? And if it is in trust, who is going to be the trustee to manage this money and at what ages do my kids get the money? So you got all of those issues once you’ve got yourself any kind of an estate. If you own a home or a condo or you have got a lot of life insurance, let’s say more than $100,000 I would strongly recommend that you go to an attorney who at least does a fair amount of his or her time doing estate planning and get some advice on how best to deal with those assets.”
But do you really need an attorney? There are many, many websites these days that let you write wills online.
“I am a little bit concerned by some of them because they seem to have a one size fits all approach. If you can find a place that is online and that has documents that have been approved by attorneys in your specific state and they show that these documents have been revised and looked at within let’s say the last 12 months, then, I think, for the smaller estates they are just fine.”
But if you do your will online, Gallo suggests you buy at least 15 minutes with an estate attorney to look it over. He says mistakes can be costly. And he says no matter what you do with regard to your estate planning, you’ll need to look it over every couple of years.
“You need to be aware that Congress’ hobby is changing the estate and gift taxes on us. So they change them virtually every year, so I tell my clients that they ought to view their estate plan as a work in process that they are going to review and update, at least review every 3 years.”
So this is a lot, right? How do you pay for insurance and save for retirement and college and pay your rent or mortgage and still afford to eat? Here is Liz Pulliam Weston…
“Well, you’ll get a paper bag for one, and blow into it. But it’s, you know, families obviously do this every single day. What you want to be absolutely clear about is that you have choices. You can reduce expenses to offset the expenses a child brings into your life and you need to do that because if you don’t, if you just keep living the way that you have been living and you were already close to the edge, you’re going to push yourself over. But it doesn’t have to be that way. You have a lot of choice in your spending and how you live your life. And kids are so worth it. I mean if one thing is worth making accommodations for, it is children. So this is something that is very worthwhile, you can definitely can do it and there is so much information available out there on the web, there are sites like Miserly Moms and The Dollar Stretcher and frugal living sites up the wazoo that can give you tips about ways to trim your budget that aren’t going to kill you, that aren’t going to involve huge sacrifices, but that can save you significant amounts of money so that you will have the cash available to save for retirement and do these other things.”
MSN Money expert Liz Pulliam Weston says it is all about setting priorities and deciding what is most important.
“And the thing about kids when they come along you see what is important, and it’s them.”
But you already knew that, didn’t you, mommy?
We hope you’ve enjoyed this Pea in the Podcast: Financial Planning for Parents-to-be. Please visit our website, peainthepodcast.com, for more information about our experts, to find links and transcripts, and to register to receive tailored week-by-week shows for each week and stage of your pregnancy. It is everything you need to know about your body, your baby and the big changes ahead in your life in your journey to becoming a mommy. For Pea in the Podcast, I’m Bonnie Petrie. Thanks for listening.