September 15, 2022
Parent Trap: a financial guide for new parents
Jon Strauss, CFP®
I always thought it was special that I share a birthday with my wife (Mary Strauss, who also is a WEIL employee). This is a somewhat rare occurrence (1 in 365), and in the past, we have often joked about which of us gets to celebrate their birthday in any given year. Imagine our surprise when, on our shared birthday, our daughter “joined the party,” being born on that day as well. This is a significantly more uncommon occurrence (about 1 in 133,333), and it made the challenge of sharing a birthday even more complicated (though, as many parents will understand, for all intents and purposes, Mary and I lost the right to celebrate our own birthdays on that day). While this was easily the weirdest part about our becoming parents for the first time, it wasn’t the last surprise we would face. Fortunately, we were armed with some knowledge and good financial practices ahead of time.
California’s Employment Development Department (EDD) allows eligible employees to take up to 8 weeks of Paid Family Leave (PFL) per year. This leave allows parents to bond with a new child after its birth, adoption, or foster care placement while continuing to receive approximately 60-70% of their weekly salary. For most people, registering for PFL is a relatively painless exercise but for those with excessively long names, things get a little more complicated.
My wife’s full name is Mary Elizabeth Hastings Strauss (Mary Elizabeth is her first name and Hastings is her middle name). The EDD requires that, when filling out their forms, you enter your full legal name as it appears on your driver’s license. Unfortunately, due to Mary’s long name, she ran out of boxes on the form before she could complete her name. Because of this, her application was denied. We spent seven months trying to sort this out, and while we eventually prevailed, we were left without a large chunk of our expected income for a long time.
Fortunately, this cobbler’s child does have shoes, and we had saved up a six-month emergency cash reserve. This saved us from having to sell securities into a down market or take on debt to pay the bills. Generally, WEIL advises clients to hold enough cash to cover anywhere between three and six months of basic expenses (sometimes more, depending on their situation and risk tolerance) to cover emergencies. We certainly were not expecting a paperwork issue to significantly impact our cash flow, but we were very glad to have an emergency reserve available when it did. Note: new parents should make sure to include additional baby-related expenses in this analysis: it turns out things like increased medical insurance premiums, daycare costs (if applicable), diapers/formula, etc. are not free.
When becoming a parent, everyone runs into surprises (some weirder than others), but there are a few other general tips I think would be helpful to most people embarking on this exciting adventure:
Make the best use of the parental leave benefits provided to you by the EDD (or if you don’t live in California, your state’s program) and your employer. In California, both the birthing and non-birthing parent is entitled to 8 weeks of PFL pay. The birthing parent can also apply for Disability Insurance (DI) which partially replaces wages for up to four weeks before the due date and an additional 6-8 weeks after birth. If they use both benefits, they must apply for DI first, before applying for PFL. Note that your PFL can either be taken all at once or split over a 12-month period. Many employers also offer benefits that supplement the PFL and DI pay to make your cash flow 100% whole.
Update (or create) your estate plan. For many young people who believe they are years away from death or incapacity, an estate plan is not top-of-mind when prepping for a baby (getting the nursery set up is usually higher on the list). In our view, the estate plan is probably one of the most important “to-do” items because you need to decide who will take care of your kids if you are no longer able to. In some cases, you may agree with the way someone would raise your child, but that person may not necessarily be someone you trust to manage money for the benefit of your child. Through proper use of a Will and Trust, you can name two different people for those purposes. A related recommendation is to update the beneficiary form for any employer-sponsored retirement plan and/or any individual retirement accounts in your name (IRA, SEP, 401(k), etc.). Retirement accounts do not automatically update beneficiaries and are not governed by your Will or Trust, so you’ll want to ensure that your new child is named as a “Contingent Beneficiary” on all the applicable paperwork.
Establish a 529 College Savings Plan. This state-sponsored investment plan allows you to save money for your child’s future education expenses. By establishing and funding this plan early in your child’s life, you can take advantage of the power of compounding interest over a long time-horizon. 529 plans are funded with after-tax dollars, but so long as the account holdings are used for qualified expenses, all the gains in the account can be withdrawn tax free. Some of the most common of these qualified expenses include college or university tuition, mandatory fees, books and supplies, and room and board. These plans can also be used to pay up to $10,000 per year for tuition at any public, private, or religious elementary or secondary school. Keep in mind that these types of accounts are earmarked for education expenses and taxes and penalties may be assessed if the funds are used for non-education purposes. We often recommend that once these accounts are established, the new parents ask their parents and/or grandparents to make gifts of cash to the 529 for the child’s birthday rather than toys or clothes (you will have plenty of those already – trust me).
If you would like to fund an account for the child which can be used for expenses beyond education, you might consider funding a Uniform Transfers to Minors Account (UTMA). While these accounts do not offer the benefit of tax-free growth that the 529 plans offer, the funds in the account may be used for expenses beyond education. For example, the child may want to start his/her own business or use the funds for a down payment on a first home. Bear in mind that UTMA accounts legally become the property of the minor once they reach the age of majority. This could be age 18 or 21 depending on the state in which the account was established. So, some consideration needs to be made regarding control over the use of the money when funding UTMA accounts.
Talk to your HR Department and understand what employer and healthcare benefits you have access to. Generally, you can only change your health insurance options during an open enrollment period but having a child is considered a “qualified life event,” which allows you to access a “special enrollment period” during which you can change your insurance benefits. Generally, this special enrollment period lasts for 60 days after you submit your application. If your spouse/partner is also working outside of the home, you should compare each of your company’s health insurance costs for minors before deciding whose plan to use. Note that many employers may cover one portion of the employee’s costs but a different portion for other family members, so you will want to be aware of this and plan accordingly.
During your special enrollment period, you should check to see if your employer offers a Dependent Care Flexible Spending Account (DCFSA). These are also referred to as “cafeteria” or “Section 125” plans. This vehicle can be used to pay out-of-pocket expenses for dependent care (like daycare, preschool, summer day camp, before- or after-school programs) using pre-tax dollars. Utilizing this benefit saves people an average of 30% on dependent care services. In 2022, the limit you can set aside for this benefit is $5,000 but if you don’t use it by the end of the year, you lose it. Note: a DCFSA can also be used for adults under your care who are incapable of self-care, so long as they are in your home at least eight hours a day and are claimed as a dependent on your income taxes.
Review your life insurance coverage. It is likely that you will need more insurance protection than your employer’s group life policy provides. We recommend purchasing term life insurance to fill in any coverage shortfalls. A term life insurance policy provides you with coverage (a “death benefit”) but only for a certain “term” (like 5, 10, 20, or 30 years). Because these policies usually do not cover you beyond a particular term, they tend to be a lot less expensive than universal or whole life insurance products. Keep in mind that it may make sense to get insurance on the life of a non-working parent to give the working parent financial flexibility to continue to work or not should the unthinkable occur. How much coverage and how long of a term is a more complicated question that we would be happy to discuss with you, but some level of insurance is almost certainly necessary to protect your family.
Note: Although permanent/whole life/universal life insurance policies absolutely have a place in some people’s financial plans (usually those who have already amassed their wealth rather than those who are just starting out), would-be buyers should be cautious. Policies like this are often pitched as one-size-fits-all investment vehicles, but, in our experience, are often not the most appropriate or cost-efficient way to get the insurance protection you are seeking. For most new parents, we recommend they buy a term policy (which has lower premiums) and invest the difference in a traditional investment vehicle.
Many of our clients have already been through the scary, exciting, surprising, and amazing experiences that come with becoming a parent for the first time. But we felt it important to write on the subject so those for whom parenthood still lies ahead (and those with friends or relatives looking to start a family) can embrace this dramatically different style of living and spending armed with some helpful tips.
As always, the Advisory Team at WEIL is available to meet with you, your children, and/or your grandchildren as we work to help build or maintain your family’s wealth and prepare the next generation of your family to navigate their financial lives.
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