I have always liked the start of a new school year. Even though I am long past my school days, it still seems like every September holds the promise of a fresh start with a new notebook in hand and an empty planner ready to record progress to accomplishments. Seeing school supply lists these days, the notebook has morphed into a computer and the planner is likely to be an app, but the sense of possibility is still the same.
Many times, students would plan out their big transitions, like moving up to high school or starting college, as an opportunity to re-create themselves into something new as they grew up, took on different activities and made new friends. And those plans to change would bring both excitement and some sense of worry.
We think that once we become adults, the big transitions will be easier and won’t cause much worry because, in many cases, we can choose when or how those changes take place. But even much-desired transitions – like getting married, accepting a big promotion or new job, or having a child – can be equal parts joyful and anxiety producing.
By having a strategy to address key items before taking on big life transitions, you can be assured that you have all the needed “school supplies” covered so you can be successful in your new stage in life. So where do you start if you are ready to take on a big transition?
Going from a single person who is primarily only responsible for yourself, to planning a wedding with a fiancé and then saying “I do” to becoming a husband or a wife is a happy time, but it can also cause a lot of financial stress. It is best to talk about your finances well before getting engaged, but even if you have discussed money and agreed on the broad strategies before the marriage, you will likely have some adjustments to make with your new spouse.
Steps to smooth your transition:
Consider a pre-nuptial agreement. if you have separate assets or debt that were created before marriage, a pre-nup is likely a good idea. If you own a business or expect that you will receive an inheritance in the future, you may be required to have a pre-nuptial agreement in place before you get married. If you are going to have a joint bank account, decide how you will handle monthly bill payment and agree on a monthly budget. You may need to start with a preliminary budget that changes if you decide to move or consider making a big purchase, such as a car or a home.Commit to regular financial updates together. Having an agreement to meet monthly or quarterly to discuss your joint financial status and progress to your combined goals can give you a sense of reassurance that you are on the same page as your partner about money. In fact, some of my clients say that they don’t argue about money anymore, because having a regular meeting scheduled means that they aren’t constantly worried about finances and know they will have an outlet for positive discussion instead.Review your tax-filing status. After you get married, your filing status will change to married filing jointly or married filing separate, and oftentimes, your combined income will put you in a new, possibly higher tax bracket. Talk to your financial adviser about running an income tax projection to see if you need to adjust your tax withholding or make estimated tax payments so you don’t get surprised with a tax bill when you file your first tax return as a married couple.
Big Promotion or New Job
Being acknowledged for great work with a promotion or accepting a new job with increased responsibilities is very exciting. You may also be faced with a lot of new challenges as well in the new position. It is helpful to have a handle on your personal finances before you start a new role so that you can focus on being successful with your new projects instead of worrying if you missed something important with your money.
Steps to smooth your transition:
Take a look at your tax withholding. if your new position comes with an increased salary, review if you need to change your tax withholding so that you have paid in enough over the course of the calendar year to qualify under the “safe harbor” tax payments rules. Safe harbor tax rules require that you make a certain amount of tax payments so that you don’t have any underpayment penalties or interest when you file your annual tax returns. Currently, the federal safe harbor rules require that you pay the lesser of either 90% of last year’s tax liability or 110% of this year’s tax liability. Ask your financial adviser to help you determine if you need to make any adjustments for your situation, including state rules.Review your company’s benefit plans. With a new role, you may now be eligible for stock options, deferred compensation plans or be granted or allowed to purchase equity in the company. Your company’s HR department will give you all the details, and it’s a good idea to review them with your financial adviser to determine what is the best strategy for your financial plan and goals.
Welcoming a Child
A new family member is a great joy, but also can be a source of financial anxiety, compounded by a lack of sleep in the beginning years. For someone so small, babies seem to need a lot of stuff, and the cost of all that stuff can add up. Before you are astounded by the cost of a pack of diapers and how fast a baby goes through them, it’s good to have a discussion with your financial adviser about what you need to plan for with your new arrival.
Steps to smooth your transition:
Update your budget. You will want to add in the new expenses, such like baby supplies. But also consider things such as childcare costs or potentially reduced income if one parent decides to work part-time or to stay home with the child. Consider benefits changes. You will want to explore your health insurance options to cover the child. If both parents are working and have health insurance, review the benefits, deductibles and out of pocket costs to determine which policy makes sense to cover the child. If you are responsible for some or all the employer policy premium cost, inquire to see if there are different costs with more than one dependent being covered (sometimes this is called family coverage) and if it makes sense for your entire family to be covered under one policy, even if both parents are working jobs that have health benefits. You generally have 30 to 60 days to add a child to your health insurance benefits after birth depending on your state laws. If your employer offers a Dependent Care Flexible Spending Account, you may want to consider making contributions so you can use tax-advantaged funds to pay for qualified childcare expenses.Be aware of possible tax updates. Finally, good news on the tax impact! Depending on your income, you may qualify for a Child Tax Credit, Child and Dependent Care Tax Credit or Adoption Tax Credit for federal purposes. Some states also offer state-level child tax credits or deductions for contributions to 529 plans, which can be used to pay qualifying education expenses for both K-12 education and college expenses. Your financial adviser will be helpful in figuring out how your tax strategy will change for your family’s specific circumstances and recommending any updates that are needed for new withholding amounts.
Whether the new persona you are looking forward to becoming is a husband or wife, the big boss or being a parent, acknowledging that there can be some anxious moments mixed in with your excitement about these changes is a good starting point. Your adviser can make sure you have covered the needed financial changes for the next step in your life – and help you be prepared to accomplish your goals and enjoy this new stage with peace of mind.
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Managing Director of Client Experience, Mercer Advisors
Kara Duckworth is the Managing Director of Client Experience at Mercer Advisors and also leads the company’s InvestHERs program, focused on providing financial planning to serve the specific needs of women. She is a CERTIFIED FINANCIAL PLANNER and Certified Divorce Financial Analyst®. She is a frequent public speaker on financial planning topics and has been quoted in numerous industry publications.