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How Much Will That Bundle of Joy Cost?
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It certainly comes as no surprise to parents that raising a child can be expensive. But just how expensive?
While many financial studies focus solely on college costs, research by the U.S. Department of Agriculture (USDA) provides parents and prospective parents with a general idea of the cumulative expenses for a child BEFORE college kicks in.
The results are sobering. The average total child-rearing costs for a child born in 2010 and living at home through age 17 range from $163,440 to $377,040, depending on the family's income level.
The USDA calculations include a wide variety of expenses, including housing, child care and education, health care, clothing, transportation, food, personal care, and entertainment.
Estimated Cumulative Child-Rearing Expenditures, 2010-2027
Lowest Income Group (<$57,600): $163,440
Middle Income Group (between $57,600-$99,730): $226,920
Highest Income Group (>$99,730): $377,040
Source:
USDA, Expenditures on Children by Families, 2010; June 2011. All figures are in 2010 dollars.
Households in the lowest income group (those earning under $57,600 per year) are estimated to spend 25% of their before-tax income on a child, while those in the highest income group (earning more than $99,730 annually) are estimated to spend just 12%.
For a middle-income family with two children, the largest expenditures are:
• Housing, at an average of 31% of total expenses
• Child care/education, 17%
• Food, 16%
• Transportation, 14%
• Health care, 8%
Total average annual costs for that middle-income, two-child family range from $8,480 to $9,630 per child. For those couples with only one child, costs tend to be as much as 25% higher. Overall, costs for single parent households average about 7% less.
Not surprisingly, geography matters. Parents in the "Urban Northeast" had the highest average expenses, while those in "Rural" areas had the lowest. It also should come as no surprise to parents that it is generally more expensive to raise a child today than it was when they were children. Average child-rearing expenses for a middle-class family have climbed nearly 25% since 1960.
The USDA website has a free calculator that can help parents estimate their child care costs. The Cost of Raising a Child Calculator factors in geography, single or two-parent status, and the costs of additional children. The tool is available here:
http://www.cnpp.usda.gov/calculator.htm.
Capital Advantage, Inc. does provide financial and education planning, so if you need help in determining how much to set aside for both childhood and college, feel free to contact your advisor at 925.299.1500.
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FAQs for Near-Retirees
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After years of saving and investing, you can finally see your retirement on the horizon. But before kicking back, you still have some important planning to do. The following frequently asked questions about retirement income should help you begin the final stages of retirement planning on the right foot:
1. When should I begin thinking about tapping my retirement assets and how should I go about doing so?
The answer to this question depends on when you expect to retire. Assuming you expect to retire between the ages of 62 and 67, you may want to begin the planning process in your mid to late 50s. A series of meetings with your Capital Advantage, Inc. financial advisor may help you make important decisions such as how your portfolio should be invested, when you can afford to retire, and how much you will be able to withdraw annually for living expenses. If you anticipate retiring earlier--or enjoying a longer working life--you may need to alter your planning threshold accordingly.
2. How much annual income am I likely to need?
While studies indicate that many people are likely to need between 60% and 80% of their final working year's income to maintain their lifestyle after retiring, low-income and wealthy retirees may need closer to 90%. Because of the declining availability of traditional pensions and increasing financial stresses on Social Security, future retirees may have to rely more on income generated by personal investments than today's retirees.
3. How much can I afford to withdraw from my assets for annual living expenses?
As you age, your financial affairs won't remain static: Changes in inflation, investment returns, your desired lifestyle, and your life expectancy are important contributing factors. You may want to err on the side of caution and choose an annual withdrawal rate somewhat below 5%; of course, this depends on how much you have in your overall portfolio and how much you will need on a regular basis. The best way to target a withdrawal rate is to meet one-on-one with your financial advisor at Capital Advantage, Inc. to review your personal situation.
4. When planning portfolio withdrawals, is there a preferred strategy for which accounts are tapped first?
You may want to consider tapping taxable accounts first to maintain the tax benefits of your tax-deferred retirement accounts. If your expected dividends and interest payments from taxable accounts are not enough to meet your cash flow needs, you may want to consider liquidating certain assets. Selling losing positions in taxable accounts may allow you to offset current or future gains for tax purposes. Also, to maintain your target asset allocation, consider whether you should liquidate over-weighted asset classes. Another potential strategy may be to consider withdrawing assets from tax-deferred accounts to which nondeductible contributions have been made, such as after-tax contributions to a 401(k) plan.
If you maintain a traditional IRA or a 401(k), 403(b), or 457 plan, in most cases, you must begin required minimum distributions (RMDs) after age 70 1/2. The amount of the annual distribution is determined by your life expectancy and, potentially, the life expectancy of a beneficiary. RMDs don't apply to Roth IRAs.
5. Are there other ways of getting income from investments besides liquidating assets?
One such strategy that uses fixed-income investments is bond laddering. A bond ladder is a portfolio of bonds with maturity dates that are evenly staggered so that a constant proportion of the bonds can potentially be redeemed at par value each year. As a portfolio management strategy, bond laddering may help you maintain a relatively consistent stream of income while limiting your exposure to risk.1
When crafting a retirement portfolio, you need to make sure it generates enough growth to prevent running out of money during your later years. You may want to maintain an investment mix with the goal of earning returns that exceed the rate of inflation.
If you wish to discuss retirement planning, please contact your Capital Advantage, Inc. financial advisor at 925.299.1500.
1 Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and changes in price.
This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Capital Advantage, Inc., a local member of FPA. |
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Getting Ready for Tax Season: 2012 Changes
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Although most Americans will not have to worry about 2012 taxes until early 2013 when 2012 tax returns are due, self-employed individuals or anyone who must pay quarterly tax payments will want to plan ahead.
And there's good news for those that do. The IRS recently announced cost-of-living adjustments for the 2012 tax year that bump up brackets, deductions, and other thresholds for inflation.
The following is a summary of the key changes for 2012:
Exemptions are up: The personal and dependent exemption increases to $3,800, up $100 from 2011.
Standard deductions have increased: The 2012 standard deduction increases to $11,900 for married couples filing a joint return, $5,950 for singles and married individuals filing separately, and $8,700 for heads of household.
Tax-bracket adjustments: Tax-bracket thresholds have increased for each filing status (see table below).
Estate tax exclusion has increased: The estate tax exclusion increases to $5,120,000, up from $5,000,000 for 2011.
The annual exclusion for gifts will remain at $13,000.
Earned income credits rise: The maximum earned income tax credit (EITC) rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC increases to $50,270, up from $49,078 in 2011.
Transportation benefits adjusted: The monthly limit on the value of qualified transportation benefits exclusion for qualified parking provided by an employer to its employees for 2012 rises to $240, up $10 from the limit in 2011. However, the temporary increase in the monthly limit on the value of the qualified transportation benefits exclusion for transportation in a commuter highway vehicle and transit pass provided by an employer to its employees expires and reverts to $125 for 2012.
Several tax benefits are unchanged in 2012. For example, the additional standard deduction for blind people and senior citizens remains at $1,150 for married individuals and $1,450 for singles and heads of household.
Details on these and other inflation adjustments can be found in Revenue Procedure 2011-52. If you need a referral to a qualified local tax advisor, feel free to call Capital Advantage, Inc.
2012 Tax Brackets:
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Filing
Single
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Filing
Joint
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Married Filing Separately |
| 10% |
$0 -
$8,700
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$0 -
$17,400 |
$0 -
$8,700 |
| 15% |
$8,700 -
$35,350 |
$17,400 - $70,700 |
$8,700 - $35,350 |
| 25% |
$35,350 -
$85,650 |
$70,700 -
$142,700 |
$35,350 -
$71,350 |
| 28% |
$85,650 -
$178,650 |
$142,700 -
$217,450 |
$71,350 - $108,725 |
| 33% |
$178,650-
$388,350 |
$217,450- $388,350 |
$108,725- $194,175 |
| 35% |
$388,351+ |
$388,351+ |
$194,176+ |
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John Hayman, CFP®
Founder and President
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Donna Zinman, CRPC®, MBA
Executive VP, Principal
Senior Financial Advisor
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Dawnalizabeth Henke,
MBA, MSFA
Chief Compliance Officer
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Sylvia Hack, MBA
Senior Financial Advisor
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Rick McNamara, CMFC®
Portfolio Manager
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Colin Taylor
Investment Analyst
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Catherine Norris, RP®
Senior Service Advisor
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Jeannie Churchill
Service Advisor
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Amy Montano
Office Manager
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