I was speaking to a friend the other day who just had her first child at the age of 40. We were discussing the many changes in lifestyle she was contemplating, including her work schedule (she is self-employed) and the restrictions she was going to place on any new business that might come her way.
After our conversation, I thought about the many changes that a new child brings to all your life plans, including the financial ones. The following is a checklist for the important items that need to be completed or revisited in your financial plan with the arrival of any new bundle of joy!
- A Social Security Number is a Must! One of the first things you should do with the arrival of a new child is apply for a social security number in the child’s name. This can be done when you apply for the child’s birth certificate (typically handled by your hospital), which is the easiest way. Your state agency will share your child’s birth information with the Social Security Administration (SSA), and they will mail the social security card directly to you. This assumes you have named your child before leaving the hospital, so it’s a good idea to have the “name game” all worked out before the child’s birth!
Alternatively, you can apply at your local SSA office. However, you will be asked for original documents to prove your child’s identity, as well as your own. Learn more information on this issue, including how to apply for adopted children.
A social security number is needed for a number of planning items, including adding the child as a dependent on your tax return; opening up a savings account (such as a 529 plan) in the child’s name or for their benefit; and adding the child to your health insurance plan.
- Add the new child to your health insurance plan. Most health insurance plans typically cover a newborn under the mother’s medical benefits for up to 30 days after the date of birth. Contact your plan once the child is born to see what must be done to add the child to your coverage. Expect your premium to increase — the average health insurance premium for family coverage topped $15,000 in 2011, according to the Kaiser Family Foundation. If you don’t have your own coverage, look into your state’s Children’s Health Insurance Program, or CHIP. As part of the federal Medicaid program, you may be able to enroll your child in low or no-cost health coverage — coverage, premiums, and eligibility will vary by state. Learn more information on CHIP.
- Review your will. If this is your first child, a will (or will revision) is essential to designating a guardian. If you and your spouse die without a will while your child is still a minor, a court will have the final say in naming the guardian. If your estate is a simple one, you may be able to prepare a will yourself. However, I would strongly urge everyone with children to use an attorney to prepare their will — the consequences of drafting a faulty will where minor children are involved are just too high. This is even more important if your child is disabled. Thus, you may want to set up an estate plan that includes a custodial account or trust to provide ongoing care for the disabled child upon your death.
- Set up a 529 college savings plan. It’s never too early to begin saving for your child’s education. Monies saved in a 529 plan grow tax free as long as the funds are used for college costs. Encourage friends and relatives to make birthday and other holiday gifts out to the 529 plan, and watch those funds grow. I would advise that the account be opened up in the name of a parent or grandparent, with the child named as beneficiary. Funds in the name of a grandparent are not reportable on the Free Application for Federal Student Aid (FAFSA) for financial aid calculation purposes. However, funds subsequently taken out of the 529 plan for the child should be reported as student income, which will impact FAFSA calculations for subsequent years. Learn more information on 529 plans.
- Don’t forget your retirement. My nephew recently had his own first child. In his thank you note for our baby gift, he wrote about his shock at discovering how expensive babies were! And his shock will only grow — the latest US Department of Agriculture numbers show the average American family will spend $226,920 to raise a child to the age of 18. This does NOT include the cost of a college education!
Parents often delay or underfund their own retirement savings in order to provide for a child’s education. However, retirement savings should come first, for a number of reasons. First and foremost, a child has lots of options regarding education. Once you decide to retire, your income options are limited. So make sure you’re not shortchanging your retirement when funding your child’s education.
In summary, it’s easy to be overwhelmed by the birth of a child, especially if it’s your first. Start with these five items and you’ll be well on your way to providing a solid financial foundation for your child.
FPA member Leslie T. Beck, CFP®, MBA, is a founding member of Compass Wealth Management LLC in Maplewood, NJ. Securities and advisory services offered through the Strategic Financial Alliance Inc. (SFA), member FINRA/SIPC. Financial planning offered through Compass. Leslie is a registered representative and investment advisor representative of SFA, which is otherwise unaffiliated with Compass.