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Life Events That Can Change Your Financial Picture

Expecting the Unexpected: Financial Planning for Major Life Changes
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Carrie Schwab-Pomerantz, CFP®, discusses how to prepare your finances for major life changes—whether expected or not. 

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Janet Alvarez:

As the old adage goes, the only constant in life is change. Major life events like marriage or divorce, the birth of a new child, or a change in career status can create more financial questions than answers. Carrie Schwab-Pomerantz, CFP®—president of the Charles Schwab Foundation and author of The Charles Schwab Guide to Finances After Fifty—joins us today to explore the ways in which we can best prepare for, and respond to, life’s biggest milestones.

You’re listening to the Insights & Ideas podcast brought to you by Charles Schwab. I’m your host, Janet Alvarez. Big changes, joyous or otherwise, can generate strong emotions and sometimes cloud our ability to make good financial decisions in the moment. That’s why planning for major life events before they occur is critical to your financial plan. Carrie Schwab-Pomerantz helps us make sense of both the pragmatic and emotional considerations triggered by major life events.

Janet:

Hi, Carrie.

Carrie Schwab-Pomerantz:

Hi, Janet.

Janet:

So Carrie, today we’re talking about life’s major milestones, the big life events that can impact us financially. What are some of those major events that you’ve seen?

Carrie:

There are many life events that we face during our lifetime, some good and not so good. And it’s really all about preparing for it. There are the wonderful events in our lives like getting married and having a child, and then there are the ones that come our way and kind of send us a curveball, such as loss of a spouse, or losing a job, or divorce.

Janet:

So those are all really pretty emotional events. And, we know, that sometimes when emotions are involved, we don’t necessarily think with our heads first. How can we ensure that we’re making the best choices for our finances when we encounter these very emotional life events?

Carrie:

Right. I think if you want to sort of weed through the emotions, or be prepared for that, I think most importantly, through your lifetime, you really need to be active and engaged in your finances. In other words, don’t keep your head in the sand. That way, you know, you can take out that part of the emotions. You know you’re set and you can kind of move forward and deal with what you need to deal with.

I think also planning is part of that being engaged. Planning for the unexpected. And then don’t be afraid of seeking advice from people you trust, lawyers, your accountant and especially your financial advisor, since it will impact you financially.

Janet:

Let’s talk a little bit more about one of those life events for which planning can be very helpful. In this case it’s marriage. It’s a very joyous life event. What are some of the typical financial considerations that a couple considering or just entering a marriage should be aware of? What should they plan for when they think about marriage?

Carrie:

Yeah. Well, keep in mind, I have this theory that we marry our opposites. So, when we start to merge our finances, it can be pretty sticky. So first, it’s really about talking about your money, talking about where it fits within your life, thinking about your goals and your future and what kind of life you want to create with one another. So it’s talking and having that open conversation and open dialogue throughout your marriage.

The other is sort of the more practical. You need to examine and define your financial relationship. What does each of you bring to the table? What does your future spouse earn? What does he or she owe? What does he or she own? And from there you want to sort of create a budget for both your long-term and your short-term goals.

And then also, how do you want to merge your finances, or not for that matter? My husband and I, we’ve always kind of subscribed to the “yours, mine and ours” approach, where we each contribute the bulk of our income to our shared account, but then we also keep a much smaller individual account for ourselves. And I think that’s really important in a marriage, because it creates a sense of independence and confidence for those who might not even be as involved.

And by the way, it doesn’t work necessarily for everyone. Everyone has to kind of find out the approach that’s best for them. I heard of a couple that were married for a number of years, but they split down everything to the penny, including even a taxi fare. So it’s totally up to you.

Janet:

So Carrie, marriage can engender another one of the most joyous life events, and that’s having a child. But as we all know, having a child is a tremendous financial responsibility in itself. Some estimates place that costing at about a quarter million dollars to raise a child to adulthood today. What are some of the most important financial considerations we should keep in mind when considering having a child?

Carrie:

Yeah, I know when you put a number like $250,000, it can be overwhelming. Having a child is so rewarding, but it does definitely add more to your budget. So I think the first thing that a couple needs to do is update your budget—and add some of the new expenses that you know you’re going to incur, such as medical expenses, childcare, food. Even diapers can be expensive.

So revisit your budget. Also really important is to update your beneficiary forms and your will, making sure you have a stated guardian in your will for your child. The other is make sure that you get a Social Security number for your child. Usually the hospital can help you with the paperwork right there.

And the reason you want a Social Security number—for multiple reasons, obviously but you want to be able to claim your child as a dependent and get some of the tax breaks.

Also, you want to take advantage of any employee benefits such as a flexible spending account for childcare. Any other types of subsidies can help you along the way.

And then there’s the big one—that’s college. That’s where it gets super expensive and where you really want to start planning right away. You know, as soon as your child is born.

Janet:

According to Carrie, a 529 college savings plan can be a beneficial tool during one life event, having a child. $14,000—that’s the maximum you and your spouse can each contribute annually to a 529 plan, per child, without triggering the federal gift tax. Another number to remember is $70,000. That’s because you can invest the equivalent of five years’ worth of contributions in the 529 plan at once and still avoid the gift tax. While you can’t make any subsequent gifts to that person for the next five years, the money can begin to grow tax-free in the recipient’s 529 account as soon as you give it.

Janet:

Carrie, let’s turn our attention for a moment to some stressful life events: spousal death, divorce. These are all things that can again catch us unexpectedly and create a lot of difficult emotions.

And making decisions around those difficult emotions isn’t always easy. We’ve talked a little bit about planning for unexpected life events that are more stressful or negative, but what are some additional considerations we should keep in mind as we prepare for the future?

Carrie:

Well, let’s start with divorce, especially since I think 50 percent of marriages do end in divorce, which is unfortunate. And that can be incredibly emotional on a couple and obviously hit them big financially. So I think, in divorce, you’ve got to be an advocate for yourself and be very engaged in your financial life.

Here are some things that you want to think about as you’re going through the process. Early in the process, you want to collect all your financial information: your property titles, your mortgage documents, banks and brokerage statements, debt, retirement plans. Make sure you have both statements from your retirement plans, because you are entitled to half of your spouse’s. And then the wills and estate planning documents. So collect your financial information.

Janet:

Carrie, what about the death of a spouse? That’s another important stressful life event we haven’t covered yet.

Carrie:

Yes. That’s a tough one. I think you need to take some time for yourself. Reach out to friends and trusted advisors. Because it is very, very emotional. And I’ve experienced it with my sister, unfortunately, who lost her husband at a young age, so I know firsthand.

But also when you’re ready, you definitely need to take action. You need to claim any life insurance. And don’t forget about any life insurance that you might have with the employer or professional associations. So there’s some hidden life insurance policies out there.

And then you need to file for all your benefits. For instance, with Social Security, you might be entitled to survivor benefits. And  if you have children under 16 years old, they may also qualify for Social Security.

And then you’ve got to kind of take stock of what you own and what you owe. So creating that net worth statement, so you understand your total financial picture. And creating a budget. And then lastly, don’t isolate yourself. Ask for help if you need it.

Janet:

Carrie, it feels like we’ve covered so many significant life events today, but there’s so many more that I know we haven’t had a chance to discuss. You know, are there any general principles that you think people should be aware of as they think about major life events that we haven’t covered yet today? Any general principles that you think would be helpful for people planning for their future and unexpected events?

Carrie:

First is to really be engaged in your finances. Be involved with the planning and preparation.

And I think it’s really important, especially in a marriage, to know where your assets are, know what you’re invested in, and be involved with the big decisions.

Also, for life events, being properly insured, including your medical insurance. Some young people think that, “I’m young and I don’t need it.” But that can totally derail your financial plans if you’re not properly insured with medical or life insurance, especially if you have children. So insurance is important.

And then having an emergency fund. Having anywhere from three to six months of cash that can pay for all your necessities for that time period. An emergency fund can help you, so you don’t have to sell stock, or take out a short-term loan in times of duress, especially like losing a job, which happened a lot in 2008.

And then always have a diversified portfolio that meets your needs, reflects your risk tolerance and your time horizon. Then you’re not subject to the ups and downs of the market, in particular when you need your money.

Also, do not be afraid to ask questions if you need help. There’s no such thing as a stupid question when it comes to your finances.

The bottom line is that if you do all this, I think you’ll be on solid footing when life throws you a curveball. And no doubt it definitely will.

Janet:

Carrie, thank you so much for speaking with us today.

Carrie:

Thank you, Janet.

Janet:

The emergency fund: It’s probably the least glamorous part of your financial plan. But in the case of an unfortunate life event, it could prove to be the most important, Carrie says. Usually, an emergency fund is an amount equal to three to six months of your normal earnings, kept in a short-term CD, money market fund or savings account. Its purpose is to cover your regular expenses in the event of an injury, illness or job loss so that you don’t have to tap other accounts devoted to retirement, or sell assets.

Janet:

Carrie Schwab-Pomerantz is president of the Charles Schwab Foundation. You can follow her on Twitter at @CarrieSchwab, that’s C-A-R-R-I-E-S-C-H-W-A-B. Or read her “Ask Carrie” column at Schwab.com/AskCarrie. That’s it for this installment. The Insights & Ideas podcast is brought to you by Charles Schwab. You can find us on iTunes or at insights.schwab.com. Thank you for listening.

Important disclosures

As with any investment, it’s possible to lose money by investing in a 529 plan. Additionally, by investing in a 529 plan outside of your state, you may lose tax benefits offered by your own states plan.

The investment and tax strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment or tax strategy for his or her own particular situation before making any decision. Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or geopolitical conditions.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

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