Tobi Kosanke, 50, sometimes wonders what she and her husband, Stefan, were thinking when they decided to have a child in their 40s. Their doctor had told the couple that their prospects at success were slim—but then along came their daughter, Jemma.
Now 9 years old, Jemma is the apple of the Kosankes' eye—but she's also the wrench in their retirement plan.
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“Before I had her, I planned to retire at 50,” Tobi Kosanke says. But that all changed once Jemma entered the picture. “Instead of saving at the rate we had been before she was born," explains Kosanke, "we had several years where we didn't save at all—and we are now far from having the ability to retire.”
The Kosankes, geologists based in Hempstead, Tex., who also run a nonprofit animal sanctuary, believe they underestimated the cost of education and activities the most—private school, summer and winter camps, and after-school singing and dancing classes all added up.
Still, Kosanke wouldn’t change a thing.
“Our finances are far from where I thought they'd be," she says. "But [I believe] my job is to put time and money into my child so she can grow into the best person she can be.”
Women ages 40 to 44 having their first child more than doubled between 1990 and 2012.
So what about retirement? “Well, 70 is the new 50, and we’re on track to retire about then,” she adds.
The Kosankes’ story is becoming more the norm as the number of first-time parents over 40 continues to rise. According to recent government figures, the rate of women ages 40 to 44 having their first child more than doubled between 1990 and 2012.
While being an older parent has it perks—like being more settled in your career and life, in general—it also poses unique challenges, especially when it comes to money. A new addition means a slew of new financial responsibilities, whether it’s upping your insurance coverage or retooling your retirement plan.
With that in mind, we tapped a slew of CFP®s—plus some 40-plus parents deep in the process—for the financial advice they’d pass along to older first-timers. So whether you intentionally delayed parenthood or the stork made a surprise visit, here are five things you should keep in mind once baby is on board.
1. Don’t Let Baby Derail Your Retirement
Diapers, doctor visits, babysitters, toys … every parent experiences the sticker shock almost as soon as they get home from the hospital. But those extra costs have an even more significant impact on a couple closer to retirement age.
Kevan Melchiorre, a CFP® with Busey Wealth Management, estimates that older parents often stash about 5% to 10% less into their retirement accounts in order to make room for their new child-related costs. It's not a great idea, considering they'll have less time to take advantage of compound growth.
Here’s an example of how taking a break from contributing to retirement could potentially have an impact: A 30 year old who starts saving $20,000 per year in a retirement account that earns 6% annually will end up with about $2.2 million by age 65. If she stopped saving for retirement for 10 years from age 40 to 50, she would have only $1.5 million by that same age. In order to catch up to $2.2 million, she’d have to save $50,000 per year from ages 50 to 65.
This example shows how time is not on your side if you cut your contributions later in life. The take-away? Retirement comes before any other savings goal, including junior’s future college costs, because while you can always borrow for college, you can’t do the same for your golden years.
“As an older parent, you could be in your 60s by the time your kids go to college, and that means balancing your own retirement planning and decreasing income with the significant costs of their education,” says Elle Kaplan, C.E.O. of wealth management firm LexION Capital.
Many people name siblings or friends as guardians, but if those folks are similar in age, it may be a bigger burden to ask them to raise a young child.
Of course, this doesn't mean you shouldn't start a 529 savings plan for your kids, if you're able to contribute—or even just open an account that other family members, like grandparents, can help fund. Bottom line? "Supporting your children must not come at the expense of preparing for your own financial future,” Kaplan says.
2. Get Your Estate Plan in Order—Stat
Creating a will and setting up powers of attorney, living trusts and other estate documents are always important tasks to tackle quickly—but it becomes even more pressing when you’re an older parent.
Melchiorre offers this sobering example. “I had a client who had her child at 42, but just never got around to updating her will and other end-of-life documents,” he says.
“Ten years later she unexpectedly passed away, leaving the distribution of her property and financial assets up to the courts, which ultimately led her daughter to lose out on hundreds of thousands of dollars in an inheritance.”
Another important consideration: Since there’s a greater likelihood that your kids could be minors if you pass away, it’s imperative to name a guardian—or the courts will make the decision for you. “This is especially important for families with children from prior marriages,” says Bob Gavlak, CFP® with Strategic Wealth Partners.
So take the time to carefully consider whom to choose as your child’s guardian. Many people name siblings or good friends, but if those folks are similar in age, it may be a bigger burden to ask them to raise a young child, says Howard Hook, CFP® with EKS Associates. He also suggests leaving assets for minors in a trust until they are old enough to manage the money adequately themselves.
3. Shop for a New Insurance Policy
New kids mean a whole new set of insurance needs, seeing as you’re suddenly responsible for more people—and expenses. So now is the time to reassess whether you have adequate life insurance coverage, as well as enough disability insurance to make sure you aren’t financially sidelined by any potential health issues, suggests Bijan Golkar, CFP® with FPC Investment Advisory. And don’t wait too long to do this, either—the older you are, the more expensive your policy is likely to be.
Michael Lang, 44, of Athens, Ga., never even thought about taking out a life insurance policy until he got married three years ago to his wife, Elisabeth, 46. That’s because he not only “inherited” her two teenage boys but they also ended up having a daughter of their own. On top of that, his oldest son is of driving age, which meant auto insurance for him was “shockingly high,” Lang says.
Even though Lang had been with the same auto insurance provider for decades, he realized it was time to rethink that loyalty. “We now shop for the best prices whenever it’s time to renew,” he says. “We’re on our third insurance carrier in three years—and it has saved us around $500 a year.”
4. Review Your Tax Credits
Here’s one benefit of being a first-time parent: You can take advantage of tax deductions you weren’t eligible for before. Typical tax breaks may include the dependent exemption, child-tax credit, dependent-care credit and adoption credit. There are also some credits given for educational costs.
However, some of these come with an income limit that “phases out” the potential benefit at higher salary levels. For older parents, this may be an issue if you’re well established in your career and making good money.
Another way to reap some tax benefits? A Flexible Spending Account, which lets you set aside pre-tax dollars to cover qualified dependent care costs or health-care reimbursements. “Consider contributing to an FSA to help pay for child care, while getting some favorable tax treatment,” Golkar says. “This is often an overlooked option that is great for older parents.”
5. Keep Your Spending in Check
We know, we know. You just can’t resist that smile—the one that lights up whenever your little one spots the latest Melissa & Doug block set. But you’ve probably worked hard to pay down the debt you racked up in your 20s and 30s, so try not to reverse that progress now. Generally, the closer you get to retirement, the closer you should be to eliminating what you owe in loans and credit cards.
Of course, one big way to control your debt is to control your spending. Kathleen Lynch, 53, a lawyer in Cary, N.C., became a first-time parent at 41. She and her husband, Micheal, were comfortable financially and had a decent amount of savings when they decided to become parents—but they still weren’t prepared for the financial stretch after having twins.
“That was a bit of a shock, but we revamped our monthly budget and spent less on ourselves," Lynch says. "There were fewer dinners out, for example, to cover the significant costs of diapers for two babies.”
To start the hunt for space in your own budget, consider combing through your fixed expenses (regular monthly bills that don’t vary too much) to see if there are any you can negotiate down or eliminate, like a subscription service.
Or figure out if there’s a flexible expense, like eating out or shopping, that you can simply cut back on. The only places you shouldn’t consider cutting for cost savings are your retirement contributions, credit card payments and building up at least six months of an emergency fund. These important financial goals shouldn’t be neglected—even when the responsibilities of parenthood come calling.