Are You Planning a Big Life Change This Year?
By Andrea Coombes | The Wall Street Journal
….Life goes on. If you are anticipating some major changes in 2013, you’ll need to do some planning.
Here’s a checklist of essential money strategies to consider before you take one of these five key steps in your life.
So, if you’re …
… Getting Married, Then
Talk with your intended about money. Discussing finances before the wedding can help forestall disagreements that can ruin a marriage.
“Money is an area of intimacy that a lot of couples heading into marriage have not yet addressed,” says Maura Griffin, chief executive of New York-based Blue Spark Financial. The conversation should include a discussion of the couple’s money values and earliest money memories. That “sets the stage for being open about money,” she says.
Get specific. Create a budget for managing expenses, discuss how to pay down debt outstanding, talk about specific savings goals and compare investing philosophies.
Decide how to merge finances. Some planners suggest separate checking accounts in addition to a shared account, but Randy Warren, chief investment officer with Warren Financial Service in Exton, Pa., says all of a couple’s money should be pooled.
“If you want your marriage to be solid, then you need to work as a team,” Mr. Warren says. Put all the money in one account, and agree on an amount above which neither spouse will go without talking to the other first.
Update beneficiary designations and add your spouse’s name to accounts. “That’s especially important for second marriages,” says Keith Beverly, principal with New Paradigm Advisory Group in Durham, N.C. “If they haven’t done proper planning, they don’t necessarily know where their assets will be directed if something were to happen to them.”
… Having a Baby, Then
Start saving for college. Many planners point to the tax advantages of 529 college-savings plans—they make it easy for grandparents to pitch in, too. But wherever you stash the money, try to save something.
“Even $100 a month can have a huge impact,” says Stephen Johnson, a certified financial planner with Charles Schwab in Boston. That said, if a choice must be made, advisers often suggest that parents shouldn’t let college costs trump retirement savings.
Prepare a will. Some couples might include creating a trust, Ms. Griffin says. A key task is to name a guardian for the child in the event a tragedy befalls the parents.
Revisit short-, medium- and long-term financial goals. For example, buying a minivan, then a house, and funding college and retirement.
Shop for life and disability insurance. Ms. Griffin says couples shouldn’t rule out whole-life insurance—it allows policyholders to save a balance and borrow against it.
… Buying a House, Then
Assess how much house you can afford. Generally, housing costs, including principal, interest, property taxes and insurance, shouldn’t exceed 28% of monthly gross income. And total debt obligations—including mortgage, student loans, credit cards—shouldn’t exceed 36%. If your costs would top those figures, “you may need to wait or buy a less-expensive home,” Mr. Warren says.
Consider the future. Spending less now may pay off later. “You’re 55…and all of a sudden you want to join the Peace Corps,” Mr. Johnson says. “Not having a mortgage allows you that flexibility.”
Manage credit. Check your credit reports. If you find surprises or errors, it may pay to delay your mortgage application until clearing those up. You can get one free credit report from each of the three credit-reporting firms—Experian, Equifax and TransUnion—annually at annualcreditreport.com.
Negotiate loan terms. Mr. Beverly says he helps clients save thousands of dollars in interest and closing costs by telling lenders about competing offers.
… Paying for College, Then
Resist student loans. Try to keep debt to 50% or less of the student’s expected starting salary, Mr. Beverly suggests. For example, if expected income is $50,000, take on no more than $25,000 in loans.
Be careful with financial-aid forms. “The number one thing is to accurately fill out those FAFSA and CSS Profile forms,” says Ms. Griffin, referring to the Free Application for Federal Student Aid and the College Scholarship Service form. “Don’t be afraid to pay a professional,” she says. “There are so many mistakes that people can make.”
Open a bank account, and discuss money management. High-school graduates “may not know how to budget or how to avoid fees,” Ms. Griffin says.
Talk about costs you won’t cover. Consider suggesting the student work over the summer to save for other costs, such as off-campus dining.
Shift investments. “Anyone who’s within two years of college, that investment allocation should be conservative. You don’t want a 2008-type situation to wipe out the earnings,” Mr. Johnson says.
… Retiring, Then
Clarify your definition of retirement. “Think long and hard about what you will spend your days doing,” Mr. Beverly says.
Detail income and expenses. “It can’t be just a gut feel,” says Jim Heafner, president of Heafner Financial Solutions in Charlotte, N.C. If you underestimate how much money you need, he says, “it can be hard to go back.”
Develop a spending plan, delineating where your income comes from. The order in which you access assets can help maximize income while reducing taxes, Mr. Heafner says. For some, that might mean tapping taxable brokerage accounts first, and letting tax-deferred individual retirement accounts continue to grow. Or, it might make sense to pay taxes now and convert some IRA money to a Roth IRA, so it can grow tax-free.
Research Social Security options. When to claim benefits can get complicated, particularly for couples. Choosing right can mean hundreds of thousands of dollars more in retirement, Mr. Heafner says.
Consider long-term-care costs. Mr. Heafner likes index annuities that provide income and a long-term-care benefit. Others might opt for traditional long-term-care insurance.
Consult with a financial planner. They have access to sophisticated software that can help ascertain a portfolio’s level of risk. Says Mr. Warren: “You want to know, ‘Am I going to drown if I get the normal volatility of the stock market, or am I going to survive it?’ “