Married With CHILDREN.
MICHAEL AND DEBORAH WILSON ARE confronted with all types of financial "priorities," from starting an education fund to paying their monthly food expenses. But without safeguarding their finances as a whole, they understand their family can't really have a solid future.
"We're from back East, so there would be no one around in case anything happened," says Deborah Wilson, 36, president and CEO of the Urban League of the Pikes Peak Region in Colorado Springs, Colorado, referring to the safety of her 4-year-old son. She and her 37-year-old husband, Michael, director of marketing services for the U.S. Olympic Committee, have a formal plan to provide for their son should something go wrong. However, that strategy is only part of an overall plan that all married couples with children need in order to ensure their overall financial fitness.
Couples like the Wilsons need to construct a financial management plan that will make their family's lives easier while they're living, not just cover worst-case scenarios if the death of one or both parents occurs. This program incorporates estate planning, a variety of insurance coverage financing a home, financing the children's education and retirement planning. These five areas make up the building blocks that provide a firm foundation for family's finances. Implement them and you'll truly on your way to a richer, better way of life.
While no one wants to dwell on the eventuality of his or her demise, making provisions to protect a spouse and your children must be a first priority. "You should talk to all of your close relatives while you're developing a plan to avoid hard feelings in the family," says Deborah. "Coming up with a plan takes some effort, but your peace of mind will be worth it."
Estate plans should always include a will. If you die without one, your state will decide how your assets will be divided, and your state's plan will unlikely be the exact arrangement you would have chosen. Name a trusted party (perhaps your spouse) to act as your executor to handle the details.
"You also should name guardians in your will," says Dawn Kountz, 39, a schoolteacher in New Haven, Connecticut, with two daughters. "A disaster might strike both parents. We took quite a bit of time on this issue, which is not easy to decide, before naming one relative who would handle our children's finances and other relatives, with children of their own, who would provide a home."
"When you have young children, you need to carry more life insurance," says Dawn's husband, Keith Kountz, 40, a news anchor for the ABC-TV affiliate in New Haven, Connecticut. "I travel quite a bit on my job, and you never know what might happen."
Richard J. Peace, a Colorado Springs, Colorado, certified financial planner who advises the Wilsons, says that many employers provide $50,000 worth of life insurance to their employees as a tax-flee fringe benefit, so a two-income couple may have $100,000 worth of coverage. "That's usually not enough," Peace contends. "Although circumstances vary, most couples should have six to 10 times their annual income in life insurance." A couple with a $100,000 income, for example, might want $600,000 to $1 million in total coverage.
Employees can often purchase additional coverage through their company at an attractive price. "That insurance may be tied to the company," Peace points out. "You might leave your job and have a difficult time replacing the coverage because your health has deteriorated."
Therefore, Peace generally recommends shopping for supplemental coverage on your own, outside of what your employer offers. "You can buy a portable policy," he says, "one that you can take with you as you go through your career."
Life insurance policies generally come in two varieties: "term insurance," which is pure protection, and "permanent insurance, whole-life insurance," which includes an investment account, commonly called the "cash value." As people grow older and the cost of pure insurance increases, the cash value can be tapped to help pay the rising premiums.
"Term insurance is much less expensive than permanent insurance," says Alan P. Weiss, a certified financial planner at Regent Retirement Planning, in Woodbridge, Connecticut, who advises Keith and Dawn Kountz. "Although permanent insurance is appropriate in some situations, many couples with young children are better off with term insurance. They have so many financial needs that they can spend only so much on life insurance; term insurance allows them to get the most coverage for the money they spend. Today, many parents choose 20- or 30-year term insurance, so they lock in a fixed price for the years when their children are dependents."
Couples with children must provide a home that will accommodate a growing family. That may be a stretch in areas such as California and the Northeast, where housing prices have gone through the roof. In Brooklyn, New York, Darrell Oliver, 35, a public relations executive, recently bought a four-bedroom "fixer-upper" where he'll have plenty of space for his wife, Kendall, 34, a school teacher, and their two young children.
"Altogether, the cost of the home may wind up to be around $400,000," says Darrell, "with as much as $150,000 in renovations. We were able to get one mortgage loan for the entire amount, which saved on closing costs." Homes in the neighborhood are currently appraised at around $550,000, on average, he says, so the Olivers expect to have substantial equity in the house after the process has been completed.
Innovative mortgage alternatives may also help couples with children climb the housing ladder. "We recently moved into a larger, home," says Deborah Wilson. "We took a seven-year, adjustable-rate mortgage; it had a low rate of 6.78% that enabled us to get more space for our money."
With Deborah taking a new job and their 4-year-old son starting pre-school, this seemed like a good time for the Wilsons to move. "We think we might be in this house for five or six years," she says, "so we wanted to lock in a low rate for that time period. If rates go even lower, we can refinance." There's a risk that the mortgage rate will shoot up after seven years, but the Wilsons are willing to bear that risk because of their prospects for higher incomes and the possibility that they might be moving to another house.
Indeed, mortgage refinancing can help parents cut costs and put more money aside for education. "We refinanced our mortgage in early 2001 because interest rates dropped from 9.78% to 7.25%," says Andrew Bryson, 41, an estimator and project manager for an electrical contractor in Toledo, Ohio. "We had seven years left on our old mortgage. Therefore, even though our new mortgage is a 15-year loan, we're paying it off on a seven-year schedule. We want to be able to stop making mortgage payments then because our two children, now 15 and 11, may both be in college and graduate school." Refinancing saved the couple nearly $54,000 over the 15-year life of the loan.
Speaking of school, don't put off building an education fund for your children: the sooner you start, the better. That's especially true if you think you might have to pay for years of private school before the first college application essay hits the word processor.
"We expected to send our children to private school," says Andrew. He and his wife, Princess L., 40, a certified surgical technologist, have been preparing to pay school bills since the beginning of their 19-year marriage.
"We saved regularly through a credit union," Andrew says. "At first we put in 5% of our income, but that has gradually increased over the years. We had a pay-yourself-first strategy: Before we paid any of our other bills, we would put money into the education account. That has paid off: Our two children are now in private school, at a total cost of $8,000 per year, but we've managed to stay ahead through our savings."
The Brysons have been saving for their children's education in their own name, a practice that is endorsed by their advisor, Toledo, Ohio, financial advisor Bill Harris. "If you use custodial accounts and place the money in the child's name, you'll enjoy some tax savings," he says. "However, the money belongs to the children when they come of age, as early as 18 [in some states]. In addition, saving in a child's name reduces the family's eligibility for financial aid. When you save in your own name, you have more control and a chance to receive more financial aid."
Now that the Brysons' older child is in high school, larger school payments are on the horizon. "She wants to go away to college," Andrew says, "and then to medical school. So we've begun to invest more aggressively, using a mix of mutual funds."
There are other vehicles that can help accumulate cash for college. "We have been using U.S. Savings Bonds for an education fund for our two daughters," says Keith Kountz. Savings bonds have many advantages: They're safe, easy to buy, and yields will go up if interest rates rise. Taxes can be deferred and even avoided in certain circumstances.
Through 2001, Education IRAs permit you to invest a maximum of $500 per child, per year, which won't make much of a dent in college bills. Next year, however, that limit goes up to $2,000 per year, which will make them more attractive. Investment earnings are untaxed while inside an education IRA and also when they're withdrawn to pay school bills.
"Even though education IRAs were helped by the new law, Section 529 plans were helped even more," says Darrell Oliver's advisor, Earl Romero, an accountant and financial planner affiliated with H.D. Vest Financial Services in New York. "They'll go from low-tax to tax-flee plans next year."
Section 529 plans (named after a portion of the tax code) are offered by most states. "You can put much more into these plans than into Education IRAs," says Romero. "Also known as qualified tuition plans, the rules vary by state, but some allow you to contribute more than $10,000 per year per student or up to $50,000 maximum every five years, whichever comes first."
The Section 529 plans can be especially appealing for upper-income parents (see "What the New Tax Law Means to You," this issue). "You have more control with a Section 529 plan than with an education IRA," says Romero. "Section 529 plans let you keep money in the account until a child is age 30. If the child doesn't spend the money for college, you can roll the account into the name of a related individual, tax-free." Thus, if your son John turns out to have no interest in higher education, you can simply transfer his Section 529 account to your newborn granddaughter Jean for ongoing tax-deferred buildup.
Under prior law, investment earnings withdrawn from a student's Section 529 plan for college would be taxed at the child's presumably low rate. "The 2001 tax law turned a great deal into an incredible deal," says Peace. "Starting in 2002, withdrawals are all tax-flee if they're used for higher education."
Some Section 529 plans offer further state and local tax breaks to residents, so it's probably worth looking at your home state's plan. Many state plans are open to non residents, so they may be more appealing. "Colorado offers state tax breaks, but they're relatively small," says Peace. "In the long-term, I'd rather recommend plans from Michigan and Rhode Island, which seem to be better managed."
Indeed, Colorado resident Michael Wilson says that he's about to fund a Section 529 plan for his young son; Peace is recommending the Rhode Island plan, where the money will be managed by Alliance Capital, one of the largest institutional investors in the country. "Long-term, it's likely that superior performance will outweigh the lost state tax breaks," says Peace.
Even though a parent's financial concerns revolve around their children, you should be investing for yourself, too. The Wilsons, who have a retirement nest egg of approximately $100,000, are well on their way. "We have a plan that calls for us to retire in less than 20 years, at age 55," says Michael, "so we invest both inside and outside of our employers' plans. So far we're on track. We're not committed to retiring at that age because we both love what we do, but we're planning with that goal in mind. By then, we expect to have enough saved so that we can keep working or retire comfortably--we'll be in control of our own future."
To Do List
Create an estate plan that includes a will and a person to act as executor of your affairs.
* Carry six to 10 times your annual household income in life insurance coverage.
* Purchase a home with an adjustable rate mortgage, or refinance your current mortgage at a lower rate.
* Start tax-deferred education funds for your self and children.
* Invest outside your traditional retirement plan.
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|Title Annotation:||managing your money|
|Author:||KORN, DONALD JAY|
|Date:||Oct 1, 2001|
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