Becoming a parent is an exhilarating experience, but also comes with a great deal of responsibility! On August 2, 2019, my wife and I welcomed our second child, Jones Carson Clay, to the world, and we feel very blessed. Between helping my wife with various tasks, including diaper changes, feedings, cleaning clothes, etc., my financial mind began to focus on the things I needed to take care of from a financial planning perspective. While I was able to accomplish most things before and after the birth of my first child, I knew adjustments needed to be made as a result of my second child being born. Below is a list of my top 4 financial planning items all parents should address to ensure their family is on the right track:
- Execute a Will
When most people think of Wills, they think of financial assets and how those assets will pass to the next generation. While the passing of financial assets is a big part of a Will, there is much more to it – specifically as it pertains to minor children. Within a Will, parents make decisions about who will take care of minor children in terms of their physical well-being (Guardian) and financial well-being (Conservator) if they predecease them. These decisions are vital because if one dies without a Will, the state of Alabama will make these crucial decisions on your behalf. Trust me, the state’s decision will NOT align with the parent’s wishes, so executing a Will should be a high priority!
- Purchase Life Insurance
Most new parents have not accumulated enough wealth to ensure the financial well-being of their family in the event of untimely death. To reduce this risk, parents should look to life insurance. For most, term life insurance, which is relatively inexpensive if one is in good health, will address this issue. Whole life insurance, or permanent life insurance, may be necessary for certain circumstances, but involves additional thought as the premiums for this type of insurance is much higher. While the life insurance decision is case-by-case specific, I would recommend purchasing enough insurance to 1) Cover all debts and 2) Provide for the family’s spendable need after you are gone. For example, if your family has $250k in outstanding debt and requires $50k per year of spendable money, you will need $1.50 million of insurance ($250k to cover all liabilities and $1.25 million to generate the $50k per year need based on a reasonable 4% withdrawal rate assumption).
- Open an Alabama 529 Plan
If funding education for your children is a goal, I would recommend opening an Alabama 529 Plan for each child as soon as possible after their birth. These accounts offer a small state income tax deduction for up to $10k per year in contributions, and the money grows tax-free moving forward and is not taxed upon withdrawal if used for qualified education. Recent changes in the tax law allow for 529 Plans to fund not only Postsecondary school but Elementary and Secondary School as well with certain limitations. These plans are a great way to set your children up for educational success.
- Revisit your Retirement Plan
As a parent, the best thing you can do for your children is to make sure you are not reliant on them later in life. To that end, it is important for parents to revisit, or create, their near/ long term financial plan. Remember that lofty goals do not get accomplished overnight, but through discipline and sacrifice over a long period of time. If you are unsure of where to begin, seek the advice of a CERTIFIED FINANCIAL PLANNER™ to get started! Your children will thank you!
Follow The Welch Group every Tuesday morning on WBRC Fox 6 for the Money Tuesday segment.
Fox 6 Talking Points:
- Execute a Will
- Purchase Life Insurance
- Open an Alabama 529 Plan
- Revisit your Retirement Plan
Marshall Clay CFP, JD, is a Partner and Senior Advisor at The Welch Group, LLC, which specializes in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters. Visit The Welch Group Web Site at www.welchgroup.com. Consult your financial advisor before acting on this advice.