It should come as no surprise that preparing for your future and retirement requires planning and commitment to the dream of a fulfilling post-career lifestyle. But planning for the future often involves the dream of having kids and a family. Whether you’re just throwing around the idea of building a family, have a family already or expecting a baby, planning for the future goes beyond investing in your own retirement. It means planning and securing a future for your family and for your children.
- What if there is a terrible accident and your children lose one or both parents? Who has been named the legal guardian or has the responsibility of managing their financial future?
- What necessary insurance policies do you have in place if your husband passes away so you aren’t left bankrupt?
- Do you have disability insurance if something were to happen and you’re unable to work in your profession again?
These aren’t cheerful and happy topics to talk about, it probably feels morbid, but absolutely necessary to discuss and to take action to plan for. Take the time now to sit down with your partner and hash out the details of the unfortunate “what if” scenarios. Do it once and get your affairs in order, and you won’t have to do it again unless your circumstances change in the future.
On the flip side, what about the great things the future holds for you and your family! Will you help contribute to your children’s college education and expenses? Are you planning on being a stay-at-home Mom or work full-time or part-time? What sort of lifestyle do you want to raise your children with?
These are very heavy topics that require in-depth discussions to be prepared for the worst, the best and the future. As a parent, it is your responsibility to take care of your children even in situations that seem unfathomable and dire.
Here are 6 things parents need to do when you are planning for, or already have children.
INVEST IN YOUR RETIREMENT
Pay yourself first and plan for your retirement first, before you plan to take care of anyone else. College savings can wait until you’re able to pay yourself 15% of your salary towards retirement and investments and then any additional can go towards additional funding such as college savings plans.
- Roth IRA
The amount that goes into your Roth IRA is pre-taxed and over time, the money is then compounded tax-free. What this means is that when you withdraw funds from your Roth IRA, it is not taxed. This is a good way to go if you think tax rates will on go up and/or think you’ll make more by the time of retirement, and thus be taxed at a higher tax rate.In 2016 you can contribute up to $5,500 (after-tax) or $6,500 if you are 50+.
- Traditional IRA
Traditional IRAs are entered into your account pre-taxed and you can claim the amount of contribution for the annual year as a deduction on your taxes, however at the time of withdrawal, you will be taxed at your current tax rate. In 2016 you can contribute up to $5,500 (after-tax) or $6,500 if you are 50+.
A 401(k) plan is offered by employers to their employees and many offer to match what you contribute or a certain percentage of your contribution. Think of this as free money if your employer is offering to contribute to your 401(k) plan. A 401(k) is taxed AFTER you withdraw the money meaning that the money you put into your 401(k) is pre-tax, you can claim it on your taxes for a deduction, and then when you withdraw, you pay the taxes at the current tax rate. In 2016, you can contribute up to $18,000 and the employee catch-up contribution (if 50 or older by year end) is $6,000.
CREATE AN EMERGENCY FUND
Determine how much you need in your emergency fund – typically 3-6 months of savings. This includes 3-6 months of non-negotiable expenses such as mortgage, groceries, auto expenses, utilities, phone and things you absolutely cannot live without. Eating out, cable, Internet, subscriptions and such are all non-necessary expenses and ones you can live without for a while.
Calculate your expenses for 3-6 months time and this is the amount you need to put into your emergency fund in case the unthinkable happens. Save this money in an accessible account, but not in an account with a card you carry in your wallet or can easily pull money from.
Check out this helpful article on How to Build an Emergency Fund.
GET LIFE INSURANCE
Are you financially prepared if your husband were to die and leave you with two children, a mortgage, and daily expenses? What if you’re a stay-at-home Mom, can you continue to support your family without the financial support of your husband?
This is where Life Insurance comes into play. Life Insurance can be purchased for each spouse in amounts that you sign-off on and is generally a low, nominal fee that you pay each month. The reason life insurance is important is if you or a spouse dies, life insurance will help you and your family continue your normal routine and pay your bills, any debt you may leave behind and even things like paying off your mortgage, contributing or financing your children’s college education and trusts.
For example, your husband may carry a Life Insurance policy for $750,000 because he is the sole earner of your family and this amount will allow for you and your children to live a comfortable lifestyle and continue to pay your bills for the next 18 years until your last child is out of the house.
This is by far, the hardest discussion you’ll have to have and to create a number equated to a person’s death. However, consider your loved ones and if something unfortunate were to happen, they would be OK.
If you choose a life insurance plan when you’re younger, you may be able to lock into a less expensive plan because you’re young and healthy.
SET-UP LEGAL DOCUMENTS
Having your legal documents in order will help your loved ones understand what you want to happen in the case of your children being left without a parent or both parents, your estate, any trusts, your debts, final wishes, pets and personal property.
With children, you need to have legal guardianship and financial representatives selected. In some states, if you don’t, even if you have relatives who could take your children in, the state is required to take them in as a ward of the state before guardianship can be appointed in court – which can take days, weeks or more!
Choose a legal guardian to someone you trust to raise your children according to your wishes. The representative that is responsible for your estate and financial aspects, does not have to be the legal guardian, it can be another person who you choose that may be better versed in this area or you feel more comfortable taking on this burden.
Other legal documents include a Living Will, Living Trust, Power of Attorney, Trusts, Estate Documents and more. It’s important to sit down with a lawyer who can draw up the documents according to your wishes and makes sure things are correctly filed.
COLLEGE SAVINGS PLANS
A 529 college savings plan is a great way to contribute to your child’s college education. Just like ongoing investments, you can set up automatic deduction plans so you can “set it and forget it.”
Contributions are not deductible, though earnings in a 529 plan grow federal tax-free and will not be taxed when the money is taken out to pay for college and education expenses. Contributions to a 529 plan do not have to be reported on your federal tax return and you won’t receive a Form 1099 to report taxable or nontaxable earnings until the year you make withdraws.
- Qualified Withdrawals for Education including tuition and fees, books, equipment for course enrollment, some room & board expenses.
- Non-Qualified Withdrawals Include: transportation costs, computers (unless the school requires them), student loan repayments.
There are other ways to save for college funds, but investing in mutual funds, you’ll have to give up a portion of your earnings to annual income taxes and can also get hit with a capital gains tax at withdrawal.
If you are planning on going back to work full-time or part-time after the birth of your children, something to consider is the high expense of quality childcare. Research what type of care you’ll have for your children and calculate the monthly and annual expense. Is this something worth going back to or not going back to worth for? If you are planning on returning to work, adjust your budget for this additional expense.
Whether you choose a daycare center, nanny, babysitter, or other childcare option, dependent care for children under the age of 13 may qualify you for a tax credit of up to 35 percent of qualifying expenses of $3,000 for one child or dependent, or up to $6,000 for two or more children.
What else have you done to prepare for your family’s future?