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A family margin of safety
Question: My husband and I are late-in-life parents (he is 59 and I am 49) and we have a 1-year-old -- the absolute JOY of our lives. She is the only child for both of us and I am wondering about what you would suggest as the most cost-effective way to save for her future? Kathleen, Fergus Falls, MN
Answer: Congratulations. I think the best way to save for her future is to focus on making sure your lifestyle is secure. In other words, pay yourself first, including an emergency savings account, opportunity fund(s) and retirement savings. I would get rid of any debts you may have outside of your primary mortgage (assuming you own a home). If you're financially secure, she's financially secure -- now and in the future.
My favorite personal financial planner is Greek philosopher Aristotle. Intellectual historians credit him with developing the idea of the good life. His most famous idea is the Golden Mean. It's that desirable although elusive middle between two extremes. The practical application of the golden mean is better known as a "margin of safety." It's the bedrock idea of personal finance for all seasons. A margin of safety perspective helps us with the financial consequences of being wrong while taking advantage of opportunities.
Then there is investing in her education. We live in an economy that values an education -- especially college. If you have the financial means, one way to create a margin of safety for her when she leaves your home is to make it so she graduates from college with as little debt as possible, perhaps even debt-free. She'll enjoy freedom of choice when she graduates and explores her job and career options.
You might want to consider opening up a 529 college savings plan for her. I've recently posted on 529 college savings plans here and here.
You also want to make sure that you have life insurance, in case something happens to either or both of you, and a will. Life insurance and a will are necessities for any new parent. Both should be at the top of your to-do list if you haven't already.
For the will, I would spend a lot of time thinking throughwho you would like to be the guardian of your daughter if tragedy were to strike. Many parents find it useful to separate the guardian raising the child and the guardian managing the inherited money.
For young children of age 50+ parents, social security is another source of college funds. If a parent collects social security, the child can also collect a social security benefit until, generally, high school graduation. The child's social security is reported on the child's income tax return and must be used for the child's benefit. We put our son's payments into a Section 529 plan.
We had set up UGMA accounts to fund our son's college in pre-big kiddie tax, pre-section 529 days. His grandmother also had set up a section 529 plan for him. Then he went to a state university under partial scholarship. Long story short, we had too much money in his name and/or in education restricted accounts. He can probably liberate his social security section 529 money because of the scholarship...but it's a lot of paperwork. He will use the UGMA money, legally his, to start his own farm. He's a practical kid with a good business sense who knows what he wants to do. Not all 21 year olds would be as good stewards of a financial windfall.
Two possible implications for you: take full advantage of Roth IRAs for tax- free and flexible retirement/education savings; and have your child start kindergarten as late as possible.
Our son started kindergarten on the early side. He lost a year of social security benefits. As a 20 year old college junior, his future career has perhaps been adversely affected by our kindergarten decision. He was aced out of US and an international well-paid internships because HR folks determined he was too young to get certain driver's licenses and insurance coverage.
