Modern family financial needs and arrangements require fresh approaches to financial planning, which has forced financial advisors to throw out their old playbook. With new financial strategies in play, parents and parents-to-be have a compelling reason to seek professional advice and strategies that address their unique needs.
Parents need a financial planner now more than before because most, if not all, of the conventional financial wisdom that is generously dispensed by friends and family is based on the old playbook. This opinion is informed not only by my professional experience as a certified public accountant but also from my personal experiences as an older parent in a blended family. The following are just a few of the ways that a financial planner can help solve modern family financial problems.
Problem No. 1: Needing to Access Retirement Funds While Still Working
Many older parents plan to tap at least a portion of their retirement savings while still working to help fund college tuition, medical expenses and other living expenses. Some employer-based retirement plans, however, restrict access to retirement funds while an employee is working for the company. This restriction is often enforced even if that employee is beyond retirement age.
Perhaps worse, assuming you can access the funds in your employer-sponsored retirement account, you must now contend with taxes. A serious and often overlooked tax trap is created when a person withdraws funds from a tax-deferred retirement account, thus triggering an increase in his marginal tax rate together with a decrease in or elimination of certain deductions. The additional taxes can be so significant that the needed withdrawal is cost-prohibitive.
Solution: Create a retirement plan that offers more control and tax diversification.
A financial planner can help parents-to-be diversify retirement savings so that not all of their retirement money is held in their employer-sponsored plans. This type of diversification can also offer significant tax advantages by giving you the ability to manage your withdrawals among different types of accounts based on your tax situation at the time.
Problem No. 2: Collecting Social Security While Working
Collecting Social Security while working presents two problems. First, if you begin taking Social Security before reaching full retirement age and continue to work, the Social Security Administration will take away a big chunk of your benefit. During 2015, you must pay back $1 for every $2 you earn above $15,720. If you earn around $75,000 per year, for example, you will lose your entire benefit.
The second problem associated with working while collecting Social Security is that your wages might trigger income tax on your benefits. If one-half of your Social Security benefit plus all of your other income, including tax-exempt interest, is greater than $25,000 ($32,000 if married filing jointly), then some of your benefit might be subject to income tax. Note that other earned and unearned income can trigger income tax on your Social Security benefit no matter your age.
Solution: Carefully consider the best time to begin taking benefits.
Many financial planners, particularly CPA financial planners, can help you plan the timing of earned income, Social Security, and retirement plan withdrawals to maximize your lifetime Social Security benefit and minimize your overall tax cost. This plan alone can put thousands of dollars in your pocket and reduce the amount of time you must work beyond normal retirement age to support your family.
Problem No. 3: Organizing Finances for a Blended Family
When writing a financial plan, blended families have all of the problems of traditional households with the added stress caused by the “mine, yours, and ours” problem. As a result, financial planning is often more awkward and emotional for blended families, especially with splitting the bills. As emotion creeps into financial discussions, communications begin to break down. Once communications break down, the probability of developing a workable financial plan with all of the needed buy-in becomes nil.
Solution: Create a financial plan that suits your unique family.
An experienced financial planner can help manage the emotional side of financial planning and budgeting by keeping the negotiations on target and by acting as a trusted advisor. Moreover, a financial planner can provide comparable figures and examples from other families to help keep discussions on track and moving forward.
Problem No. 4: Creating Financial Security With a Single Income
Most parents struggle to make ends meet. In my experience, expenses grow to match whatever income one might earn. Single parents have the added concern of income security. This problem can be exacerbated by the lack of a support system. However, the lack of income security experienced by single parents can be mitigated by reducing risk in other financial areas.
Solution: Learn how to be hypervigilant about your financial planning.
Single parents, perhaps more than most, must be hypervigilant with their financial planning. The trick to planning the financial future of a single-parent family is to reduce the amount of risk taken in other areas of the family’s financial life. This approach most often involves getting life and disability insurance as well as finding very low-risk methods for growing the family’s college and retirement savings.
In addition, financial planners can help find ways to leverage the tax code to your advantage by helping you arrange your finances so that you maximize your ability to qualify for tax breaks and credits offered to parents. Examples include the earned income tax credit, credit for child and dependent care, child tax credit, and an increased standard deduction and personal exemption — to name just a few.
Problem No. 5: Managing Household Expenses With Inconsistent Income
In my experience, the most significant issue that self-employed parents face is managing household expenses with an inconsistent income. For example, a self-employed friend told me recently that he “cannot buy groceries with someone’s promise to pay.” A financial planner isn’t likely to be able to make your clients pay, but he can help you manage the financial realities of self-employment.
Solution: Use accounting and statistical data along with financial models to plan your cash flow.
Financial planners, and CPA financial planners in particular, can be of great help to people who are self-employed. Financial planners can help self-employed parents and parents-to-be by using statistical data and mathematical models to predict future income. The financial planner can then help you use this information as a foundation for your household budget. The end result is a much less stressful life.
A financial planner can also help you manage your finances to minimize taxes. As a self-employed parent, you have far more tax-planning opportunities than your traditionally employed friends. A financial planner can help you make the most of all of these advantages.
More Tax and Financial Planning Tips for Parents
Don’t assume that college savings should take precedence over retirement savings. Think about the flight attendant’s instructions the last time you flew: If you’re flying with small children and the oxygen masks deploy, put on your mask before you put on the child’s mask. This is good advice for savings as well. You’re probably not helping your kids in the long run if you spend your retirement fund on their college education only to be forced to move in with them when you cannot afford to live during retirement.
The Child Tax Credit and Other Tax Concerns for Families
The tax code is child-friendly. Here are just a few ways being a parent pays at tax time:
- If you’re having a baby before the end of the year, you can adjust your withholding now and use the extra cash to save for the new baby.
- Don’t forget the child tax credit. Depending on your income, you can receive a tax credit of up to $1,000 per child. If you’re buying in bulk, this is almost enough for diapers and wipes for the whole year.
- If you pay for day care so you can work, you might be eligible for the child and dependent care tax credit. This credit is worth 20 percent to 35 percent of your dependent care expenses, depending on your income.
- Families with earned income might be eligible for the earned income tax credit, which is one of the most valuable tax credits available to families with low to moderate income.
Your Financial Plan Will Change Along With Your Family
The key to turning new frustrations into opportunities is to ignore outdated, conventional wisdom and seek the advice of an experienced financial planner. Your advisor can help you take advantage of new ways of managing your financial obligations and even provide a shoulder to cry on, so to speak, when needed.