Now Saving Money for Big Life Changes

In part one of this article, we looked at saving money – how you can financially plan and prepare for a wedding and for buying your first home. In this next part, we will take a close look at two more life-changing events that require savings: having children and preparing for retirement.

1. Saving for a Growing Family

Our first child is still a few weeks old so I can’t really speak to the day to day expenses, but I’ve been told there will be a lot of diapers. In fact, the stats I looked up told me anywhere from about 4,000 to about 10,000. Rather than recommend how couples should save for having a baby, I can suggest carrying enough life insurance for your spouse to take care of the kid(s) if something happens to you.

My general rule is to plan on about $100,000 of coverage for each child if you are not intending to pay for college. If you are, and you want life insurance to cover that, you’ll need to add about $200,000 for a public university 18 years from now or $400,000 for a private school at some point in the future.

“Well can’t I use a special account for college savings?” Yes, you can, but consider two questions: how much of the education you want to pay for and if your child doesn’t go to college or gets a full ride – what are you going to do with that money? Typically, a 529 college savings plan allows you to save for their education and take a state tax deduction if you use the state sponsored plan.

If you’re going to pay for all four years at a private school you need to start putting away about $1,000 per month (assuming a 7% average annual interest rate).  But in 18 years if your child doesn’t need that money, and it’s in a 529 plan, someone has to use it for college expenses otherwise there could be penalties and taxes on the withdrawals. A Uniform Gift to Minors Act (UGMA) account allows you save for the child’s future expenses and invest however you want to. The money can be used for anything as long as it’s for their benefit. The catch is once they reach the age of majority (18 in Ohio), that is their money to do with what they please.

Another avenue, and the one my wife and I use, is through indexed universal life insurance. The details of such a plan are beyond the scope of this discussion (but your insurance agent would be happy to discuss them with you). In my opinion, it is a tax efficient strategy to help make sure there is money available for college if it is needed. If it’s not, then guess what, there is still cash there and it can be used for literally anything if it’s needed. And if one of us dies before our daughter goes to school, there is a death benefit that will be available if needed. It was honestly one of the better planning decisions we have made together.

2. Saving for Retirement

Retirement savings deserves its own entire discussion but here are a few pointers I can give if you are just starting to think about this kind of goal:

  1. In your early years your “plan” will change several times. Be prepared to make adjustments to that ideal retirement picture you have when you go through any of the above situations or change jobs.
  2. Enroll in the 401(k) and contribute at least the amount your employer is matching. In my opinion, that’s free money and you’re never going to be unhappy that you put it away. (For more, see: 5 Things to Think About When It’s Time to Retire.)
  3. In addition to your 401(k), establish a relationship with a financial advisor and ask questions about other types of retirement accounts – a traditional IRA, Roth IRA, annuity products, general investment accounts, etc. You can Google away at all of those things and probably develop a pretty good understanding. But absolutely nothing will compare to the conversations you’ll have about your money and your future with someone that you get along with. When I Googled my sore shoulder, in about an hour I was pretty sure I had sciatica. My chiropractor told me that I just needed to sit up straight. He was right.

Once you have a clear goal in mind about what you want your money for and what you need it to do in the meantime, you’ll actually enjoy saving. And after you and your financial advisor have set up specific accounts for specific events, you will take an active interest in the types of investments you have and how they perform. So don’t just put money into a savings account for the sake of saving, be sure that you’re making the right decisions based on the things you want to accomplish.

Securities and investments advisory services are offered solely through Ameritas Investment Corp. (AIC). Member FINRA/SIPC. AIC and Decker Financial Group/Creative Financial Partners are not affiliated. Additional products and services may be available through Joe Decker or Decker Financial Group/Creative Financial Partners that are not offered through AIC. Representatives of AIC do not provide tax or legal advice. Please consult your tax advisor or attorney regarding your situation.