How to Secure Your Family’s Future (Even in Uncertain Times)
There’s nothing like starting a family to get you thinking about—and planning for—the future. Becoming a parent brings so many unknowns, both in the short term (What will they look like? What will their first word be?) and the long term (Where will they go to college? Will they have to care for me when I’m older?). The answers to those short-term questions are exciting to imagine, and you’ll find out the answers before you know it. But those longer-term questions surrounding your new financial and emotional responsibilities may pick up on some of the anxiety you’re feeling even before baby arrives.
“There are a new set of risks that come onto your plate that weren’t necessarily there before baby,” says Michael Schwartz, a certified financial planner and CEO of Magnus Financial Group. “Even in less uncertain times, it’s critically important to rethink your financial planning with an addition to your family.” The good news? A little preparation goes a long way. And while you may not know exactly what the future will bring, here’s a look at some scenarios you might face, and what you can do now to help protect your family.
Nothing hits the family budget as quickly as the loss or reduction of one partner’s income. While you might be able to land a new job quickly or find a side hustle to help supplement a salary cut, in tough economic times, it could take longer than you think. That’s why it’s even more important than ever to build up an emergency fund with at least six months’ worth of expenses to help tide you over.
If that seems like an unachievable number, start small. Trina Patel, financial advice manager for Albert, a financial app, suggests stashing 10 percent of your monthly income in a savings account at the same bank you have your checking account. “You want to make sure your savings are available in case of emergency, but not too readily available that you’ll tap into it [for nonemergencies],” she says. “Once you’ve built it up, you can always transfer it over to another bank that might offer a higher interest rate and keep some cash in your primary savings account.”
Coronavirus may be top of mind these days, but unfortunately there are many other serious medical issues that could impact you or your family’s health, as well as your finances. Take the time to evaluate your health insurance now, and giant doctor or hospital bills may be one less thing you have to stress about down the line.
Start by reviewing your existing health insurance plan and what it covers. “The plan that you chose previously may not be the plan you need once you have children,” says Ric Edelman, founder of Edelman Financial Engines. To determine how much coverage you’ll need and can afford, consider your premium, deductible, copay or coinsurance and out-of-pocket maximum, factoring in pregnancy and childbirth costs and baby’s doctor appointments. (Well visits should be covered, but certain testing and procedures may not be.) “It’s complex, but the basic issue is balancing cost versus coverage,” Edelman says.
Having a baby is considered a “covered event,” so you’re allowed to change your health insurance plan outside of your open enrollment period (usually within 30 days of baby’s birth—check with your provider). No matter which plan you choose, be sure to make the most of your benefits, like a flexible savings account or a health savings account that lets you use your pretax dollars to cover out-of-pocket health expenses.
You’re not the only one hitting a new phase in your life. Your kids’ newly minted grandparents are also getting older. (Hello, sandwich generation.) It may be awkward to talk about financial and health care planning with your parents, but it’s important to know if they’re prepared for their own future, or whether you may have to provide support for them as well. A recent AARP study found that a third of midlife adults are financially supporting their parents, and more than 40 percent expect to do so in the future.
It’s also a smart idea to discuss how they want to be cared for (and by whom) as they age. Edelman suggests asking your parents whether they have long-term care insurance and an up-to-date estate plan, which typically includes a will and health care directive along with other information about what should happen to their assets. If you’re their executor, ask to see the estate planning documents so that you can ask them questions. “Talk to your parents and express your concern,” he says. That way you can help them understand that you’re not fishing for an inheritance, but wanting to confirm that you’re on the same page emotionally and financially.
Discussing this worst-case scenario may be unnerving, but it’s also the best way to protect your family. First, you should have a will and choose a guardian if you haven’t already. Beyond that, life insurance can allow the surviving spouse or children to maintain their lifestyle or achieve goals (such as paying for college) that they wouldn’t otherwise be able to do if something happened to you.
Many employers offer life insurance as part of their benefit plan, but it’s often tied to employment (meaning you don’t always get to keep it if you leave your job) and may not provide adequate coverage. Buying your own life insurance can help fill the gap between what your company might offer and what you actually need. You can opt for term life insurance, which offers coverage for a set number of years (usually 10, 20 or 30), or whole life insurance, which is a lot more expensive but lasts your entire life.
Edelman recommends that most people go with a term policy, and advises against using multipliers of your income to determine how much you’ll need. Instead, he uses the following rule of thumb: Take the amount of life insurance you currently have, divide it by two and drop a zero. So a $500,000 policy, for example, would provide you with enough funds for $25,000 a year for 20 years, or just over $2,000 per month.
“If that’s not enough, you need more insurance,” he says. And the earlier you purchase it, the better. That’s because younger, healthier people can typically lock in lower rates than those who wait to purchase until they’re older. You may also be eligible for a discount by purchasing a plan through the same insurer that supplies your home or auto policy.
About the experts:
Ric Edelman is the founder of the independent financial planning and investment management firm Edelman Financial Engines. Ric founded the firm on the belief that all American investors—not just the wealthy—deserve access to personalized, comprehensive financial planning and investment advice.
Trina Patel is a financial advice manager at the financial management and advice app, Albert. She has more than 10 years of experience in the financial industry ranging from private banking to running her own financial coaching business.
Michael Schwartz, CFP, AEP, is a wealth management adviser and the founder and chief executive officer of New York-based Magnus Financial Group. Michael began his career in finance over 20 years ago and has been recognized nationally as a premier wealth management adviser in the financial services industry.