The best money moves for every season of your life
(Article by Gary Belsky from Money Magazine, August 1997)
The decisions you make at life's biggest moments can have a seismic impact on your finances. Here are smart things to do at each stage.
Guy Hager, 38, a corporate trainer in Aiken, S.C., dropped out of Ohio State University in his freshman year partly because he didn't have enough money for tuition. "I was determined that my son wouldn't have that problem," he says. So two months before Russell, now 8, was born, Hager signed up for an automatic investing plan that currently puts $200 a month in stock mutual funds earmarked for college. Hager estimates that Russell's college kitty, today worth more than $12,000, will grow to $75,000 or more by the time Russell is 18. "There's not a chance I'd ever save that amount if I hadn't started when I did," Hager says.
Hager capitalized on a fundamental but often overlooked fact: The money decisions you make at a few of life's major crossroads can have a disproportionate effect on your finances. "By making the right moves at watershed moments, such as having a baby, changing jobs or retiring," says Don Kukla, a certified financial planner and public accountant with the Moneta Group in St. Louis, "you can ensure that you get the most out of your money and, hopefully, out of your life."
To identify the crucial events that occur during each season of your life--and the key financial moves you need to make at those times--MONEY interviewed more than three dozen financial planners, accountants, attorneys, authors and consumers. Below you'll find the seven monumental moments they pinpointed, plus the advice you need to make the most of them.
GETTING MARRIED (OR REMARRIED)
Talk about money. Because Americans are marrying later--the median age for first marriages is 27 for men and 25 for women, vs. 25 and 22, respectively, in 1980--they are increasingly set in their financial ways before they wed. To avoid nasty surprises, Olivia Mellon, a Washington, D.C. psychotherapist who specializes in money issues, advises couples to give each other a full accounting of their debts, investments and spending patterns, and agree on a budget before getting hitched.
Think--carefully--about a prenuptial agreement. With 1.2 million couples divorcing annually in the U.S., it's not unreasonable to plan for the worst. An estimated 5% of the 2.4 million U.S. couples who marry each year sign prenups (estimated cost: $1,500 to $3,000), which spell out how assets will be divided in case of divorce. According to New York City matrimonial lawyer Millicent Greenberg, you should seriously consider a prenup if you or your intended has children from a previous relationship, if one partner owns a business or if one partner earns significantly more than the other or has significant assets he or she doesn't want to share.
Prepare for emergencies. If you haven't already set aside three to six months' worth of living expenses to cover you in case of emergency, now is the time to do so. Stash the cash in a safe, short-term account such as the top-yielding money funds listed on page 43. Rick Fermin, a senior vice president with the Foster City, Calif. money-management firm Bailard Biehl & Kaiser, also recommends that breadwinners who aren't covered by a disability insurance policy at work find coverage on their own. A healthy 40-year-old man earning $60,000 a year might pay $2,000 annually for a policy that will replace 60% to 70% of his salary; a similarly aged woman would pay $2,200 or so.
Start saving for retirement. According to the Employee Benefit Research Institute (EBRI) in Washington, D.C., only 56% of employees of large and medium-size companies are covered by traditional defined-benefit pension plans, down from 70% as recently as 1988. Kukla's advice? Contribute as much as possible to tax-deferred retirement plans at work, such as 401(k)s and 403(b)s.
HAVING A BABY
Keep saving. According to the U.S. Department of Agriculture, the total cost of raising a child born in 1993 to age 17 is a staggering $334,000, and that's before Junior heads off to college. Today's newborn will face more than $204,000 in tuition, room and board bills for a four-year education at a state college, according to Raymond Loewe, president of the Marlton, N.J. research firm College Money; an Ivy League education will cost upwards of half a million dollars. Don't let that number paralyze you. "It may be impossible to save all you need," says Westerly, R.I. financial planner Malcolm A. Makin, "but you can make a big dent if you get a head start."
Rethink your insurance. If you are among the lucky parents of the 3.8 million babies born in the U.S. each year, you need enough life insurance to provide for your offspring's upbringing and education in case you die, stresses San Diego financial planner Pat Frost. When her third child was born in 1982, Frost, now 44, convinced her husband Larry that it was worth the roughly $100 monthly premiums for a $250,000 death benefit on both their lives. Larry was killed in a car crash less than four years later. "I don't know what I would have done without that money," says Frost. How much coverage you need depends on several factors, including your goals, assets and debts. A general rule of thumb is to buy a term life insurance policy that pays a death benefit equal to at least five to seven times your annual salary, says Makin.
It's also time to review your health insurance. Because kids mean lots of visits to the doctor's office, managed-care plans, such as health maintenance or preferred-provider organizations, may make more sense than traditional fee-for-service plans: HMOs and PPOs often don't require a deductible, and the fees for office visits are usually zero to $20.
Write a will. Both you and your spouse need one to ensure an orderly distribution of assets and to name a guardian for your child if you die. Typical cost: $1,500 to $3,000 each.
BUYING A HOUSE
Get pre-approved for a mortgage. This move involves submitting a formal loan application in return for a lender's commitment that you can borrow up to a set amount (see Your Money Monitor, page 42). That's a huge advantage in hot housing markets, as clothing company executive Michelle Sizemore of Oakland learned last year. Sizemore made a $265,000 offer for a two-bedroom cottage in suburban Oakland on the same day another buyer made an equal bid. "The sellers wanted a sure thing, and because I was pre-approved they took my offer," says Sizemore, who estimates she avoided a bidding war that would have cost her $15,000 more.
Consider using a buyer's broker. Unlike a traditional real estate agent, who represents the seller's interest, a buyer's broker works to negotiate the best deal for you. Typically, says Joseph Eamon Cummins, author of Not One Dollar More! How to Save $3,000 to $30,000 Buying Your Next Home (Kells, $19.95; 800-875-1995), buyer's brokers save consumers 5% off the home price they would have paid had they used a traditional agent. That's about $6,000 off today's $124,000 median price for a previously occupied single-family home. Call the National Association of Real Estate Buyer Brokers (415-591-5446) for references.
Inspect your home with a fine-tooth comb. The $200 to $500 you'll pay an inspector to ferret out problems with the roof, plumbing and other potential money pits is worth it if the outlay keeps you from buying a house with thousands of dollars of hidden problems. Call the American Society of Home Inspectors (800-743-2744) to find a qualified inspector in your area.
CHANGING (OR LOSING) YOUR JOB
Stay covered. If you're being laid off or if there is a waiting period before your new job's health coverage kicks in, tell the benefits department of the company you're leaving that you want to continue your existing coverage under the terms of the Consolidated Omnibus Budget Reconciliation Act (COBRA). This law says that companies with more than 20 employees must guarantee departing workers the right to carry their coverage for as long as 18 months, at about the same group-rate premium their employer had been paying.
Remember also to maintain your disability coverage. When Dennis Shermeta left his job as surgeon-in-chief of Wyler's Children's Hospital at the University of Chicago to enter private practice in Phoenix in 1988, he wisely increased the coverage on his Northwestern Life Insurance disability policy, which until then he had been using to supplement his group coverage. A few years later Shermeta, now 57, developed a skin condition that severely curtailed his ability to work. The disability policy kicked in, paying Shermeta about $60,000 annually and allowing him to retire comfortably last year. "It's a good thing I listened to my agent when he told me to bump up my coverage," he says.
Keep your retirement funds shielded from taxes. According to EBRI, an alarming 58.5% of Americans who receive a lump-sum distribution from a retirement plan upon leaving their job don't roll over the funds into a similar plan at their new company or into an IRA. Such a mistake will cost you dearly if you're younger than 59 1/2: You'll generally pay income taxes and a 10% penalty on the money, and you'll have to start saving for retirement anew. If you're a confident investor, your best move is to stash your savings in an IRA, which offers unlimited investment options, rather than moving it to your new job's plan.
Cut your financial ties fast. New York City certified financial planner Melissa Levine says that separated or divorcing spouses should initiate independent relationships with financial service providers as soon as possible. Notify brokerage firms, credit-card companies and other lenders in writing that you are no longer responsible for newly incurred debts of your soon-to-be ex. "You want to make sure your spouse doesn't rack up debts or make investments that you're on the hook for," Levine explains.
Look before you leap into a settlement. Although divorce is costly--legal fees alone can range from $3,500 to $5,000 a person for even the simplest split--avoid the temptation to settle quickly. As Chicago financial planner Ellen Rogin notes, "Many people agree on terms that seem ideal at the moment but prove disastrous over time." One example: insisting on ownership of a house as part of a settlement, only to find that one salary is not enough to maintain the property. The smarter move: Tally your expected future income and expenses before making any decision.
Take taxes into account. Rogin advises many separated couples who are not yet divorced to opt for "married filing separately" status when completing their tax returns. "Filing jointly may be cheaper," she says, "but when you sign that return, you're taking responsibility for the actions of someone from whom you want to distance yourself."
RECEIVING AN INHERITANCE
Hurry up and wait. Some 58% of Americans ages 30 to 59 expect to receive an inheritance worth a median $125,000, according to a 1997 study by Phoenix Home Life Mutual Insurance of Hartford. However much you receive, says financial planner Kukla, "You'll be grieving for the death of a loved one, so you probably won't be emotionally prepared to make sound financial decisions right away." Kukla advises clients to park their inheritance in a money-market mutual fund for six months or so. "By then you'll have a better idea of your long-term needs and goals," he says--and you can invest the windfall accordingly.
Steer clear of fast-buck financial advice. If you're not already familiar with the basics of financial planning, think about taking a local adult education class on the fundamentals of money management. Once you've learned the basics, consider hiring a reputable financial adviser, ideally a certified financial planner. Ask trusted friends whom they recommend, or call the National Association of Personal Financial Advisors (888-333-6659) for references.
LEAVING THE WORK FORCE
Mind your medical coverage. Americans are retiring earlier than ever. Only about a third of U.S. males age 55 and older are still working, according to the U.S. Department of Labor, compared with almost 70% in 1950. If your employer does not provide post-retirement health-care insurance and you're not yet 65--the age at which you qualify for Medicare--your first priority should be to secure coverage. Call your regional Blue Cross/Blue Shield or check the Yellow Pages for HMOs that allow individual memberships. When you turn 65, sign up for Medicare Part B (cost: $43.80 a month), which covers 80% of doctor bills, outpatient surgery, X-rays, lab tests and other medical essentials.
Be smart about Social Security. If you choose to receive Social Security benefits at age 62, your monthly benefit will be about 20% smaller than if you had waited until age 65. Indeed, the longer you wait to start collecting, the higher your benefit will be: For each year you delay after age 65 until age 70, your benefit will rise 3% to 8%, depending on what year you were born. The bottom line: If your need for money is immediate, or if short life spans run in your family, it's probably wise to start collecting your benefits as soon as possible. If, however, longevity is in your genetic code and you can afford to hold off for now, waiting is the better deal.
Borrow while the borrowing is easy. Even if you have a sterling credit history, lenders will be less likely to fork over money once you no longer have a regular paycheck. So if you're thinking of refinancing a mortgage or buying a new car, for example, do so before you sail off into the sunset. Also consider opening a home-equity line of credit now, in case you'll need it in the future.
Take your money and run. Many companies offer retirees the chance to annuitize the money in their pensions and retirement plans, which gives them fixed monthly payments over a set number of years or over their lifetime. That's generally a bad idea, says Marvin Rotenberg, national director of retirement services for BankBoston: "Fixing your payout leaves you vulnerable to inflation."
Rotenberg says that most people should instead roll over retirement savings into an IRA. That's what Raymond and Jean Kropke of Mountain Home, Ark. did when Ray retired from his sales job at meat manufacturer Oscar Mayer in 1993. Offered an annuity that would pay him approximately $2,800 a month, Ray opted instead for a lump-sum payout of nearly $300,000, which the Kropkes have invested in five U.S. and international stock mutual funds. Today their nest egg is worth more than $400,000 and generates $2,800 in monthly income. "The smartest thing we ever did was take control of our money back then," says Ray, 62. "Now we're living the life we want."