What's New With You? How Your Answer Can Affect Your Financial Plan

By Sherrill St. Germain
January 2008

Most people realize that their financial plan depends on their particular personal circumstances, and that if those circumstances change, their plan may be affected. The hard part is recognizing when change is about to happen -- the ideal scenario -- or has happened -- better late than never! The New Year struck me as a good time to highlight the kinds of changes that might affect a financial plan. Here are some examples of life changes along with ways to avoid pitfalls and take advantage of some unique opportunities.

Area of Change

Earnings on the rise? Now's the time to increase your savings rate. Yes, you can contribute to both your 401k AND an IRA, assuming you meet income and other limits. (Self-employed with no employees? Check out solo 401k plans.) Already maxed out tax-advantaged plans or saving for something else? Set up auto-investing to a regular taxable account.

Decrease in income? You may qualify for tax breaks commonly phased out at higher income levels, such as Roth IRA contributions and education tax credits or deductions. Those in the 10% and 15% income tax brackets may be eligible for a 0% capital gains tax rate on gains in 2008.

Expenses going up? If what is on the rise is tax-deductible expenses over which you have control of the timing (e.g. elective dental work), you might benefit from "bunching deductions" into a single year.

Decrease? When does that ever happen??? Well, for example, if you've finally finished paying off your mortgage or your car, keep paying that amount out every month -- only redirect it to your own account. See previous section for savings strategies.

16 -- If your child is Sweet 16, you may be about to embark on a couple of new financial challenges. The first is the cost of parenting a teen driver. Even if you don't have plans to buy a car for your teen's use, your cash flow may have a hard time absorbing the cost to insure a teen driver. Plan ahead! Second is preparing for college costs. If you haven't already started learning about college financial aid by the time your child is 16, visit finaid.org ASAP!

50 - This is the age when you become eligible to make "catch-up contributions" to your 401k, IRA, or other retirement plan. So if your retirement nest egg could use a boost, taking advantage of these higher contribution limits for the 50+ crowd might be just the thing. NOTE: You are eligible if you turn 50 any time during the calendar year.

59½ - This is the age when you can (finally!) take withdrawals from most retirement plans penalty-free. Whether it makes sense to do so or not depends on your situation.

70½ - This is the age when you must begin taking withdrawals, called Required Minimum Distributions (RMDs), from tax-deferred retirement plans, and paying taxes on that income. The answers to the questions "How much must I withdraw?" and "Exactly when must I start?" aren't 100% straightforward, so it's critical to see a financial planner if you need help getting it right. Why? Because there is a hefty 50% penalty (yes, that's fifty percent) for failing to take your RMD.

Having or adopting a baby? This one's big, with potential impact to nearly all areas of your financial plan from cash flow to life & disability insurance, savings/investing strategies to estate planning, and more. A good time for a checkup.

In the past, welcoming a new pet into your home wasn't usually seen as a big financial event. But with advances in veterinary care, specialized foods and equipment, and pets' elevated status, pet owners are definitely feeling it in the wallet. Some planning, possibly even pet health insurance, may be in order.

Soon to be an empty-nester? This is likely to have an impact on cash flow not unlike getting a raise. (See savings and investment strategies above.) On the other hand, when you can no longer claim your children as dependents, you might expect to see an increase in your income tax liability.

As anyone who has experienced it knows, divorce almost always has a major impact on financial stability at a time when most families are least equipped to deal with such things. Still, attention to financial matters can make a huge difference in the aftermath, so this is one of the most important times to enlist the help of a financial planner.

Finally, in addition to the emotional impact, the loss of a family member can have financial implications. This recent article about inheritance tackles one possible outcome. The flip side of this is the scenario where the family member was underinsured. Again, this is a critical time for a financial checkup.