I will never forget the moment last December when my first child was born. My wife and I had agreed to keep our baby’s gender a secret so we would be surprised on delivery day. “It’s a boy!” I exclaimed as the doctor presented my crying son. Everyone told me that having a child changes everything – and they were absolutely right. I immediately felt a strong sense of responsibility to protect my growing family and provide them with a healthy and happy life.
There were many changes that came after that day, starting with the car ride home from the hospital. My 15-year-old car that had been perfectly adequate just days before no longer suited our needs. I immediately traded it in for a newer model with the most up-to-date safety features for our precious cargo.
As we began to settle into our new family routine, I knew there were a few key financial planning items I wanted to take care of to help provide security for my family’s future. I was happy to put what I’ve learned as a financial planner to use and take the important next steps in my family’s own financial plan.
Choosing a Life Insurance Policy
The first thing I did was to update the contingent beneficiary on our life insurance policies so that the proceeds would pass to my son if Juyun and I both passed away. My wife and I had each purchased term life insurance policies a couple years back when we bought our condo. With our plans to have a family we felt it was important to each have some life insurance should one of us pass away, to help the surviving spouse meet living expenses, pay the mortgage, and have some stability during a difficult time. The right amount of insurance to carry can vary depending on the level of expenses and the amount of income being replaced, but for many individuals, carrying $1M-$2M of life insurance should be sufficient. This is an extremely important piece of the financial plan for anyone with young children, as insurance protects against the loss of a parent’s income that provides support to the family. Should my wife or I die, we know that the money would be there to help.
There are a few different types of life insurance policies available, and it was clear to me that term life insurance would work best to meet my family’s needs. Term policies keep the premiums low and allow us to pay for and carry the insurance for only the time we need it. The need for life insurance is greatest during the years when the children are young and expenses and liabilities (such as the mortgage) are at their highest. For many, the need for life insurance diminishes over the years as children age and become more independent, and mortgage balances are reduced. Term life insurance policies are also flexible in that they can be cancelled by the policy holder at any point without penalty. If a policy holder no longer needs life insurance, simply stop paying the premiums and the policy will be terminated.
In contrast to term life policies, whole life insurance policies are typically designed to be permanent. In my opinion, the flaw with these permanent policies is that many years down the road a policy holder most likely will continue to pay for life insurance coverage that is no longer needed. Personally, I don’t anticipate needing life insurance 20+ years down the road when my kid(s) are more independent and our mortgage is nearly paid off.
Setting Up an Education Savings Plan
The next financial planning step we took was to open and contribute to a 529 college savings plan. These 529 plans offer individuals the ability to invest funds for growth and use the money to pay for qualified education expenses tax-free. An 18-year investment time horizon provides plenty of time for the investments to grow, and like any good financial planner I believe the tax-free growth is a fantastic benefit.
I opened a Utah-based My 529 account and funded it with a modest lump sum. I also turned on an automatic $500 monthly contribution from my bank account as a “set it and forget it” approach. I selected the “Age-Based Aggressive Growth” investment option that is designed to start off aggressively allocated toward stocks, and then becomes more conservatively allocated toward bonds through time as my son approaches his college years. With the automatic deposits and the age-based investment plan in place, the account is set up well for growth without needing much day-to-day maintenance. Both sets of grandparents also wanted to contribute to the account and we thankfully accepted cash gifts that were immediately deposited into the 529 plan account.
Over the years, I expect the money to compound into a nice nest egg available to pay for the allowable expenses such as college tuition, room and board, books and supplies and equipment like a computer. I plan to keep an eye on the account balance through time and be mindful not to overfund the 529 plan. Under current law, if the money isn’t needed for college, the beneficiary of the account can be changed to another family member, such as another child, niece, nephew, or even keep it eventually for a grandchild.
Creating an Estate Plan
The final piece of our financial plan was the most time consuming but is extremely important – creating an estate plan for my family. We worked with an estate planning attorney to create a living trust, powers of attorney and wills. Having our estate plan documents in place allows Juyun and I to dictate what will happen with our assets when we pass away. Importantly, it allows our assets to pass to our designated beneficiaries while avoiding the California probate system.
We also designated a guardian for our son and a trustee for his assets should something happen to both of us. We talked a lot about who should be the guardian to love and raise our child and who should serve as trustee to manage his financial assets. An important consideration is whether the same person should serve in both roles or whether the roles should be split. Having the same person serve as guardian and trustee provides simplicity, while having two separate individuals serve the roles can provide checks and balances that may be beneficial. There is no right or wrong answer here and what works best will vary based on each family’s individual circumstances.
For my wife and I, the process of discussing these details and plans with each other was incredibly beneficial. While we expect that our estate plan will need to be amended down the road as life goes on and our situation changes, taking the time to establish a basic estate plan for our young family was a valuable step in our overall financial plan.
Once our estate plan was in place, we updated the contingent beneficiaries on our retirement accounts and life insurance policies with the name of our trust. We also updated our home and investment accounts to also be titled in the name of our trust. Adjusting the titles and beneficiary designations appropriately allows all of our assets to pass in the manner that we desire. These steps put all the pieces together in a fully functioning estate plan.
The feeling of accomplishment after completing everything was fantastic. It was satisfying to know that I was doing what I could as both a dad and as a financial planner to help secure my family’s future. I felt free to then focus on the late-night feedings, diaper changes, bright smiles and all of the other many wonderful things that came with becoming a new dad.
Each family has unique circumstances to consider and if you would like to learn more about how to set up a financial plan for your family, please contact a member of your Cerity Partners wealth management team.
Cerity Partners LLC (“Cerity Partners”) is a registered investment adviser with offices in California, Colorado, Florida, Illinois, Ohio, Michigan, New York, Massachusetts, and Texas. Registration of an Investment Advisor does not imply any level of skill or training. This commentary is limited to general information, and should not be construed as personal tax, legal, or investment advice. There is no guarantee that the views and opinions expressed in this piece will come to pass. The information is deemed reliable as of the date of this commentary, but is not guaranteed, and subject to change without notice. It should not be considered as an offer to sell or a solicitation of an offer to buy any security.
Meet the Author
Peter is a Principal based in the Silicon Valley office. He provides investment management and financial planning advice to individual and institutional clients. In this role, Peter stewards his clients toward their financial goals by creating customized solutions that meet each client’s specific parameters.
Before joining Cerity Partners, Peter served as a Director, Wealth Management at B|O|S and as a member of the Financial Planning Team, developing long-term wealth planning strategies for affluent clients. Prior to joining B|O|S, he worked in the Financial Institutions Group at Chubb Group of Insurance Companies, analyzing professional liability risk for banks, insurance companies, and all types of asset management firms. Additionally, he analyzed professional liability risk for publicly traded corporate clients at American International Group.
Peter earned his Bachelor of Arts in Economics from the University of California, Berkeley. He holds the Chartered Financial Analyst (CFA) designation and is a member of both the CFA Institute and the CFA Society of San Francisco.