Families look out for each other. We hold our children’s hands as they cross the street, and we set money aside for their college tuition. We support our spouses when they change careers, and we pool our assets to save for retirement. We care for our parents as they age, and we create an estate plan to preserve our assets for the next generation.
Indeed, acts of mutuality are embedded in the decisions we make daily to protect the ones we love. While the physical and emotional support we provide are most often associated with relationship building, however, it’s the financial plans we put in place that string together the safety net.
“A financial plan is like a road map,” said John Gajkowski, co-founder of Money Managers Financial Group. “If something should happen to you, it gives your family input on how you want your estate to be resolved, or how you want them to be taken care of. It helps you chart a course to provide for the people and the causes that you care about.”
1. Estate planning
An estate plan, for example, ensures that your assets will be distributed according to your wishes after you pass. However, it also takes the pressure off your loved ones, who might otherwise be forced to guess at what you would have wanted for end-of-life care or who you intended to bequeath the family silver to, which can cause family infighting.
By taking the time to protect your assets through trusts and other legal structures, said Justin Halverson, co-founder of Great Waters Financial in Minneapolis, Minnesota, you can also help to minimize taxes for your future heirs and keep your estate out of probate, which is the costly and lengthy legal process of settling a decedent's estate. (Related: When a trust might be needed)
If you have minor children, he said, a will is particularly critical as it allows you to designate a guardian if you should die unexpectedly, which ensures that they will be cared for by the person you deem best, rather than letting the courts decide.
2. Retirement saving
Putting your retirement savings needs first is also an act of mutuality.
How so? By funding your 401(k) retirement plan or individual retirement account (IRA), you help ensure that you will have enough saved to cover your living expenses when you retire so you don’t outlive your assets — or become a burden to your kids.
Parents who save for themselves before they attempt to save for their kid’s college tuition, or to help them qualify for a mortgage, are doing everyone a favor. Remember, your kids can always borrow money for college and a house, but there are no loans to cover the cost of retirement. (Related: Saving planning)
“Having a well-crafted retirement and estate plan not only gives you the peace of mind and confidence to live your retirement greatly, but it will also ensure that you leave behind an organized legacy for your heirs so your assets don’t become a burden,” said Halverson.
3. College funding
If your savings are sufficient and you have enough left over to help pay for your kids’ college education, so much the better. From an earnings standpoint, a college diploma is one of the best possible ways to give your kids a financial leg up.
According to the latest data from the Federal Reserve Bank of New York, the average college graduate earns $78,000 a year compared with $45,000 for those who attain only a high school education. 1(Calculator: How much do I need to save for college?)
529 college savings plans, which offer tax-free growth when the funds are used for qualified education expenses, can help you reach your college savings goal. Other tools to help pay for tuition expenses include Coverdell Education Savings Accounts (ESAs) and IRAs, which can be used penalty free to help pay for higher education costs. You will still owe taxes on the earnings in an IRA.2
Permanent life insurance policies can also provide funds for college, since the cash value you accumulate up to the amount you've paid in premiums can be used tax-free during your lifetime for any expense. Take note, however, that access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and increase the chance the policy will lapse. If this happens, it may result in a tax liability.
4. Disability and life insurance coverage
According to Halverson, adequate insurance coverage is one of the cornerstones of financial planning and a critical form of protection for those we love most.
“To the extent that you have an insurable need, you typically want to have at least enough insurance to match your debt and make sure any final expenses can be covered,” he said. “You don’t want to leave a bill behind for the next generation.”
Disability insurance is designed to help cover your living expenses in the event that you become too sick or injured to work. If you or your loved ones depend on your income, a financial professional can help you determine how much coverage you may need. (Learn more: Disability insurance)
Similarly, life insurance can provide a benefit that can help replace your income, or a portion of it, in the event of your passing, so your loved ones can cover costs associated with college tuition, mortgage payments, or even retirement income gaps. (Learn more: 9 questions you should ask about life insurance)
Families demonstrate acts of mutuality every day. With unconditional love, we make choices that benefit each other. As you continue to provide emotional and physical support, keep in mind that effective financial planning is an important part of the safety net you provide for those you love.
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This article was originally published in May 2018. It has been updated.
1 Federal Reserve Bank of New York, Despite Rising Costs, College Is Still a Good Investment,” June 5, 2019.
2 Internal Revenue Service, “Topic No. 557 — Additional Tax on Early Distributions from Traditional and Roth IRAs,” February 13, 2020.