Volume 13, Issue 3    


Becoming a Financially SAVVY SINGLE PARENT

Raising children without a partner is an enormous challenge—emotionally, physically, and especially financially. Overwhelmed by the work involved in earning a living and caring for children, single parents can sometimes feel they will never be able to break the cycle of living paycheck to paycheck. But even if you have a limited income, you may find that simply managing your money better can alleviate your financial problems and allow you to save for the future.

Analyze Your Expenses

The first step is to take stock of your situation. What are your fixed costs? How much do you pay for housing, utilities, transportation, and childcare? If these expenses alone eat up most of your income, leaving you with little money for groceries or discretionary spending, then you should consider whether some of these costs can be reduced or eliminated entirely.

If your mortgage, property taxes, and utility bills are too much for you to reasonably handle, selling the house and moving to a smaller place may be your best option. It will likely be difficult for you and your children to leave the family home, but the prospect of having more money to spend on other things may cushion the blow. Similarly, it may make sense to trade in that late-model minivan for a more fuel-efficient used station wagon.

If you need childcare while you are at work, there may be ways to reduce your costs. Daycare centers are often more expensive than programs offered by churches or the local YMCA. If your children only require after-school care, a stay-at-home mother may be willing to help out in exchange for your babysitting services at other times.You may also want to speak to your employer about whether you can work a flexible schedule or do some of your work at home. If you must pay for childcare, be sure to claim all available tax deductions and credits.

Control Spending, Start Saving

Next, assess whether you can cut back on other forms of spending. By keeping a diary of all expenditures over the course of a month, you will likely identify some fat that could be trimmed from your budget. Simply replacing takeout with fresh, but easy to prepare, meals can save a bundle.

By getting your spending under control, you can start planning for the future. After establishing a fund for emergencies, you should think about your retirement and education goals. If your workplace offers a 401(k) plan, try to contribute at least enough to take advantage of your employer match. You may also want to consider putting money into an IRA. If paying for your children's college education—or your own—is a priority, there are several tax-advantaged accounts that can help you save efficiently.

Secure Insurance Protection

While money may continue to be tight, it is important not to overlook the need for adequate health, life, and disability insurance. How would your children cope if you were gone or no longer able to work? Having some coverage in place to protect your family may be less expensive than you imagine, and it will ease your mind. All families need health insurance; if you do not receive benefits through your employer, look into a high-deductible catastrophic policy that covers the costs of serious illness or hospitalization. Depending on your income, your children may be eligible for public health insurance programs.

Despite all your efforts to cut costs and adhere to a budget, you may still find yourself with credit card debt. If possible, move the debt from higher-interest to lower-interest credit cards. It is usually best to resist the temptation to consolidate your debt, as many of these services charge high fees.

Sticking to a budget can sometimes feel like an exercise in deprivation, but it doesn't have to be if you set aside money for a few treats, like a weekly family pizza night. Even if you can only contribute small amounts, create a "fun fund" to be used for a vacation or a trip to the amusement park. Providing for a family on your own is a challenge—but it's one that can be met with good habits and careful planning. 20/20

Pension Payout Options: WHAT'S RIGHT FOR YOU?

Thoughts of retirement are often accompanied by images of the enjoyable ways you'll spend your days. One thing you may not even consider, though, is that you may be faced with a very important decision come retirement day. If you participate in a company pension plan, you'll have to decide how you want to receive your pension proceeds. Typically, most pension plans give retirees the following choices:

  1. Income for the rest of your life (single life option)
  2. Income for the lives of both you and your spouse (joint and survivorship option)
  3. A lump-sum distribution

At first glance, you might think your marital status will dictate which option is best for you. But, there's a lot more to it than that. Let's take a closer look at the options. The first two options (single life and joint and survivorship) provide you with a fixed income (usually in monthly installments) in exchange for your pension balance. The third option (lump sum) allows you to take your entire pension balance, and you can manage it yourself.

If you're worried about outliving your assets, regardless of your marital status, you should take one of the two "income" options. It's a simple way to ease your fears about running out of money. If you're single, this choice is easy because you can select only the single life option. If you're married, however, it's a different story altogether because you can choose either income option.

The single life option pays a higher monthly income, but payments cease at your death. While the joint and survivorship option pays a lower monthly income, payments continue until the death of both you and your spouse. If you have other substantial retirement assets or your spouse has his or her own pension, taking the larger income offered by the single life option may be your best bet. On the other hand, if your pension is all you and your spouse have, the spousal security offered by the joint and survivorship option might make sense.

As you carefully review these two income options, keep in mind that there may be an actual "third" income option. This third option is really a combination of the first option—the single life option—and life insurance. By taking the higher income with the single life option and using some of that income to pay the premiums on a life insurance policy, you may be able to "net" more income than with the joint and survivorship option. All the while, your spouse will be protected by a potentially significant life insurance death benefit. After your death, the death benefit proceeds will be received income tax free by your spouse and can be used to help fund his or her own retirement income.

The success of this strategy—often called "pension maximization"—depends on your age, health, the type of insurance policy, and the schedule of premium payments. The issuance of a life insurance policy is subject to underwriting approval. You should proceed carefully with this approach until a policy has been secured in your name. The issuance of a policy at a reasonable premium is not guaranteed. If the premium takes up too much of your monthly benefit amount, this strategy may not make sense. In addition, guarantees of a life insurance policy are based upon the claims-paying ability of the insurer. Your situation should be analyzed carefully with the assistance of a financial professional before proceeding with this strategy.

As previously mentioned, selecting either income option requires that you give up your pension balance in exchange for income. In other words, you can't just select a payout option one day and then decide at a later date that you'd like to receive your remaining pension balance in a lump sum. With this in mind, let's turn our attention to the final payout option—the lump-sum distribution.

Taking Control

If you want full control over your pension assets during retirement, or if you are concerned that your pension income may not keep pace with the cost of living, then a lump-sum distribution could be the thing for you. You can take a lump-sum distribution in one of two ways. You can either roll it over into your own Individual Retirement Account (IRA) or you can receive the pension proceeds net of income taxes. Unless you plan on using your pension assets for something other than retirement, don't even think about receiving your lump sum net of income taxes. The IRA rollover makes the most sense because you'll continue to receive the benefits of tax-deferred accumulation and only be taxed when you take withdrawals from the IRA.

As you can see, before you relax into a comfortable retirement, you must carefully consider your financial strategies to determine how to meet your needs and goals. 20/20

Fighting Inflation with LIFE INSURANCE

Inflation can essentially take the "muscle" right out of your future purchasing power. It may similarly affect your life insurance, triggering the need for additional coverage to help protect your current lifestyle and future objectives. In the interest of protecting against the eroding effects of inflation, here is a quick look at three common reasons to strengthen your life insurance coverage:

  • Home mortgage costs. The days of staying in one home forever may be long gone. Americans seem to be constantly on the move—perhaps the increased mobility may stem from factors such as greater employment opportunities, dual incomes, and changing family dynamics. These factors may be contributing to today's growing trend of purchasing "more" house than in the past. Likewise, escalating real estate prices have translated into larger mortgage loans. So, if you have recently purchased a home, you may consider obtaining additional life insurance to help cover your new mortgage.
  • College tuition bills. If you are planning on sending your children to college, you may be concerned about the rising costs of higher education. For the school year 2006–2007, the average annual cost of a four-year private college increased 5.9% from the prior year to $22,218. The average annual cost for a four-year public school was $5,836, which increased 6.3% from the previous year (The College Board, 2006). Because of rising costs, it may be prudent to develop a contingency plan, such as utilizing life insurance in the event of an untimely death. Having this coverage in place can help ensure the educational funding will be there for your children even if you're not.
  • Everyday expenses. Groceries. . . gas. . .movies. . .family vacations. . .or home improvements. Whatever the outlay, inflation will greatly affect the costs associated with maintaining your family and lifestyle. And, if your life insurance needs are based on your current income and today's cost of goods and services, you may potentially short-change your family's future. Your insurance strategy should include an assessment of both your current and future needs, as well as objectives to help you manage these expenses.

Staying Ahead of the Game

Determining your current and future life insurance needs may require you to pay careful attention to inflation and its potential effect on your lifestyle objectives. You may want to consider battling this erosion factor by reviewing your insurance coverage annually to help ensure your life insurance policy remains a contender in the continuous fight against inflation. 20/20

Which Came First: BASIS OR GAIN?

At some point, we've all contemplated the paradox about "the chicken and the egg." But, what about basis and gain? You probably know that when you sell a certain asset for a profit, you will be required to pay capital gains tax. But, you may be interested in knowing that how you acquired the property and what you have done with it since acquisition will affect the determination of "basis" and, ultimately, the "gain" on which the tax is paid.

Basis is the starting point for determining gain upon the disposition of any asset. In its simplest form, basis is an owner's investment in the asset. For purchased property, starting basis is the original price paid. Basis can be increased (e.g., by making improvements to real property) or decreased (e.g., after a casualty loss reduces the value of an asset), and it can change according to how it was acquired and the nature of the eventual disposition.

For example, suppose you gift some appreciated stock to your child. Your child will assume your original basis in the stock. On the other hand, let's say your child receives the same appreciated stock as part of his or her inheritance. In this case, the basis is adjusted to the fair market value (FMV) of the stock at the time of your death. This is commonly referred to as a "step-up" in basis.

One thing's for sure—just like the chicken and the egg, basis and gain walk hand-in-hand! 20/20

The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
The information contained in this newsletter is for general use and it is not intended to cover all aspects of a particular matter. While we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. Therefore, information should be relied upon only when coordinated with professional tax and financial advice. The publisher is not engaged in rendering legal, accounting, or financial advice. Neither the information presented nor any opinion expressed constitutes a representation by us or a solicitation of the purchase or sale of any securities. This newsletter is published by Liberty Publishing, Inc., Beverly, MA, COPYRIGHT 2007.