How to Prepare (Financially) For a New Baby
How to Prepare (Financially) For a New Baby
October 21, 2020
By Ian Yarberry
This article discusses overall planning and savings options that can work for someone right out of college to someone preparing for retirement, male or female. So even if your version of “preparing for a baby” is on the side of taking intentional steps to not have a baby right now, this article has great insights about Benefits Enrollment which is right around the corner. There are also general things to look for even when looking for a new job at a different company and comparing benefits packages.
According to Unum in 2019, “…nearly three-quarters of working adults spend 45 minutes or less reviewing their benefits before enrolling.”1 For most households, taking some extra time now could mean savings thousands of dollars in a single year by finding a health plan and utilizing other benefits designed to provide tax-benefits for funds you will already spend in certain categories.
With 2021 Benefits Open Enrollment period for most companies and state exchanges starting in a couple weeks, take some time now to review your options so that when the window opens, you can be ready. While it sounds like a lot, you probably need to speed more than 30–45 minutes reviewing your enrollment information every year, especially this year, amid the COVID-19 pandemic. This is according to a CNBC article with tips about what to watch out for.2 Even if they do not have the 2021 information yet, you should still be able to get a good idea on the different options they have and an estimate of the costs using the 2020 plans and other benefits. Even if you use the same health plan and there is no change to your premium, see if there were any changes to other figures like the deductibles, out of pocket maximums, or new items/procedures that are now covered.
Click here 3 for a glossary on different health insurance terms that might be used in this article.
HSA expense eligibility list here 4
FSA expense eligibility list here 5
HSA vs FSA comparison here 6
Things You Can Do Before the Birth (Approx. > 1 Year Away):
- Review your company’s vacation and leave policies, in addition to FMLA
- Be aware on any limits to carrying over vacation time. Most employers put some sort of cap on how much time you can accrue. For example, they might cap you at 2x your annual vacation allotment.
- If your company uses different types of paid time off (i.e. vacation time, sick time, and personal time vs total PTO) know which ones they will pay you out on if you leave the company.
- Review for both parents. According to BizJournal.com, around 40% of employers offer time to both mother and father, up from 25% in 2015.7
- Review your health insurance options at work
- If you are “young and healthy”, an HSA plan might be an option to consider while your medical costs are low. According to the Mayo Clinic, “If you’re generally healthy and want to save for future health care expenses, an HSA may be an attractive choice.” 9 Unlike an FSA that is “use it or lose it”, and HSA plan not only can carry over every year, but it also is yours to keep if you change jobs or retire. At this point, they are the only triple-tax advantage account: contributions are tax-deductible, assets grow tax-free, and funds can be withdrawn tax-free when used for qualified medical expenses.
- Some employers contribute to your HSA at the beginning of the plan year to help cover potential immediate expenses. This is generally yours to keep even if you separate that year.
- Even CO state employees (PERA) and Federal Employees (FEHB) offer an HSA option 10, 11
- Know what other expenses your health insurance covers
- According to the CDC, about 12 percent of women have difficulty getting pregnant or carrying a pregnancy to term.12 There are different state laws about what is allowed to be covered or what must be covered when it comes to infertility treatment. 13 Ultimately, taking time to read the fine print on your health plan states what is covered and what is not is best.
- In Vitro Fertilization (IVF) can be very expenses if out of pocket and even if its partially covered. However, the HSAstore.com shares how one couple used an HSA to cover some of the costs. 14
- Evaluate both your and your significant other’s existing life insurance policies.
- According to LifeHappens.org, a non-profit company providing information about life insurance that is not also an insurance company, “Many Americans are uninsured or underinsured: Just 50% of Americans own a [life insurance] policy….” 8
- The younger you are, the cheaper life insurance policies are assuming your health stays the same. Even if you are not even married yet, if you think there is even a remote chance you will get married and/or have a child in your life, you can save money by starting a life insurance policy now.
Things You Can Do Before the Birth (< 1 Year):
- Review your families’ health insurance plans
- Having a child or adopting a child is a qualifying event so you can make adjustments to your health insurance outside of the enrollment period under a “Special Enrollment Period”. There is a time limit on making these changes so reviewing the best course before the birth will help reduce the time spent on decision once the clock starts.
- Sometimes you can change things entirely, like going from an HSA to a PPO plan. While others you can only change amounts. For example, you might have to elect the Dependent Care FSA during the normal enrollment period, but you can change the dollar amount you contribute during your special enrollment period.
- If this is your first child, your premium most likely will go up so you will need to adjust your household budget accordingly. A Box of Costco Size 1 diapers contains 192 diapers and is about $30. Newborns go through about 8-12 diapers a day so one box will last between 2-4 weeks.
- If this is not your first child, you might already be in the family category and your health insurance premium might not change for any subsequent children.
- Review your other benefits like Flex Spending Accounts (FSA)
- According to the US Bureau of Labor Statistics, 39% of private industry and 63% of government employees had access to dependent care FSAs. 15
- Once you have reviewed how your budget will change and confirmed your employer offers Dependent Care FSA or Healthcare FSA, you can decide if one (or both) might work better to help with upcoming expenses.
- Review your employers’ leave policy
- More Employers are offering paid leave for both parents, so it is best for both to investigate their company’s policies.
- If you are new to a job, check to see if there is a waiting period before you can qualify for paid time away. Some employers require you to have worked for the company for a certain time, say 9-12 months, before you qualify for the full time-away benefits.
- Know how the time needs to be used. Are there minimum increments that you must use the time and when does the time off “expire”? For example, you might have 10 weeks of paid time off that needs to be used in two-week minimum increments and expires on the babies first birthday.
- If you have part of your pay based on bonuses, know how extended time away affects those calculations. Some employers lower the qualifications while others do not. Keep this in mind when reviewing your budget.
- Be aware of what systems/programs you might not have access to while you are on leave. You might plan on working from home when in fact your access is turned off.
- Review your existing life insurance policies
- For most first-time parents, chances are the only life insurance you have is through your employer called group life insurance. Take some time to review how much coverage you currently have (if any) and how much coverage your spouse has. These are generally in increments of your annual salary.
- Review any additional riders like Accidental Death and Dismemberment (AD&D). These might only cost a few dollars per paycheck but add a selected multiple if you die in an accident or even lose a limb or an appendage in an accident. If you are young and otherwise healthy, the chances of you dying are extremely low however, if you die, the chances of the cause of death being an accident are extremely high. Unintentional injuries are the leading cause of death for ages 10 – 44 according to the CDC. 16
- While there is some mobility to group plans (keep your plan even if you leave the company), the coverage might not be enough depending on your family goals and if you want to increase it, you have to complete medical underwriting anyways.
- If one parent decides to stay at home indefinitely, you might need to look at additional coverage. While life insurance is generally income replacement, it generally makes sense that even the stay- at-home parent has coverage too. If the stay-at-home parent dies, day-care is needed or the surviving parent stays home, even temporarily.
- Start to talk about life after the birth with your spouse (if you have not already).
- While nothing needs to be set in stone, start the conversation about when each of you will go back to work and how that will look.
- While more companies are providing “paternity leave”, most still do not. In these cases, dads will need to use personal time off which requires saving vacation time.
- Start to talk about who will get up in the middle of the night with the newborn. Spoiler alert dads, it does not default to the mom all the time. Having this conversation a few months before the birth is better than at 3am when both of you have been sleep deprived for a couple weeks.
Things to Do After the Birth:
- Update the family health insurance. There is a time limit on this, generally 30-60 days from birth (Qualifying Life Event), so do not delay. Have these documents ready before you start any paid leave time.
- Open a specific college account
- Once you have the baby’s Social Security Number, you can open a college savings account like a 529 or UTMA with as little as $50, sometimes nothing to start.
- Getting this opened soon makes it easier to deposit any extra funds that relatives might send to you and the baby.
- Evaluate your current paycheck income tax deductions *
- While it might be nice to get a refund check in April, if the higher health insurance premium puts a strain on the monthly expense, it might not hurt to adjust your paycheck withholdings. All else equal, this means more money in your pocket now but less of a return at tax filing.
- Wills and Trusts (Estate planning)*
- Children cannot own financial accounts so if something happens to both parents, a guardian would be named to handle both the finances (life insurance proceeds) and become the legal guardian. Control over your estate assets and life insurance proceeds and custody of children do not have to be the same person. There are pros and cons to each option. If you do not name a guardian ahead of time, the courts will. 17
- Medical Power of Attorney*
- If you and your spouse plan to take trips without the kid(s) and leave them with their grandparents (or any babysitting / family member), it might make sense to get temporary medical power of attorney documents drafted if there is an emergency and the grandparents has to take the child to the hospital.
This might seem overwhelming, but we can simplify it for you. Take a look at the enclosed checklist and our calculators on our website. Talk to a financial professional at Capital Resource Group, Inc today. There are different kinds of life insurance and college savings accounts with pros and cons of all of them. We can do the heavy lifting and find what is best for your family while you spend your time with your new baby.
While we believe having a full financial plan is best, we understand that might not be in everyone’s budget so we also offer specific options for evaluating and providing recommendations for setting up HSA Investments, setting up your 401(k) or evaluating existing loan/credit balances to help decide how to pay them off to help lower your monthly expenses.
For many young professionals, budgeting is one of the biggest items of their concern which is fitting because it is one of the most important items to be aware of. If you carry a balance on a credit card that has an interest rate of 15-25% percent, it is near impossible to offset that with investment returns. While there are “free” apps out there where you can link your financial accounts to track goals for spending and savings, these are littered with ads and these companies sell your data to third parties for ads. Our financial planning software allows you to link your accounts to help track your spending and goals and we do not sell your transactions to other vendors or companies.
Some of this information has been from personal experience since items like vacation time, parental leave time, and FSAs are left entirely up to employers and not publicly available, outside of companies choosing to participate in surveys. It has been from my recent experience with our 2.5 year old, 1.5 year old, and (shhhh don’t tell) our third due March 2021, all during my career as a Financial Advisor over the last 9 years. This has included working for two large corporations before transitioning to an independent financial group, utilizing Group Health Plans and now Colorado’s Health Exchange and individual direct plans.
In addition to normal investment risks associated with stock and bond mutual funds, there are other risks with HSA’s since they are generally used in conjunction with “High Deductible Health Plans (HDHPs)” which means that if you need care above your annual check-up ( and other explicitly listed preventative care), you have to pay that fully out of pocket until you reach your deductible which could be $3,000 – 6,000 per individual. Always refer to your Plan’s documents to compare the different values. This article is based on the current federal tax-code which is subject to change at any time. There are also different state-specific laws regarding tax benefits, time-off, and health insurance that can be applicable to your situation. For specific information about your health insurance, please consult your summary plan description or the full insurance contract available with your HR department or the insurance carrier. We attempt to use sources that are credible, but we are not liable for wrong or outdated information from third-party websites. Securities offered through Securities America, Inc., member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Capital Resource Group, Inc. and Securities America are separate entities.
*Capital Resource Group, Inc and its employees do not give tax advice or legal advice. Insurance products are offered through third-party insurance companies and subject to approval of medical underwriting.