Episode 528 – Financial Considerations When a Baby is on the Way

Welcome to the Your Life Your Wealth podcast with John Walker and Jason O’Meara, helping you find clarity and comfort for your life and wealth.

John Walker:
Hey, welcome to the Your Life, Your Wealth podcast. I’m John Walker, Regional Vice President at Mercer Advisors. Always a pleasure to be with you and glad to welcome in my co-host and good friend and colleague, Mr. Jason O’Meara, CERTIFIED FINANCIAL PLANNER and Market Leader here at Mercer. Jay, thanks for joining me.

Jason O’Meara:
Of course, John. And, you know, you and I just had a birthday, which we actually celebrate on the same day. Birthday buddies, birthday buddies there. And it, you know, it kind of reminded me, certainly don’t remember my own birth journey, but I certainly remember the what it felt like to expect our first child. And so, you know, you and I both have, have two kids, and probably, you know, remember that.

John Walker:
Anxiety, the expectation, the joy, the, you know, if you’re blessed with children, there’s a lot of emotionality that goes into that, and it’s such a meaningful milestone for many, many families in their life, but it’s also really complex financially, right? And so, you know, there’s all the stuff you got to think about, you know, pediatricians, where’s the baby going to sleep, you know, what type of leave do you have? That’s all a lot. And you know, how’s your wife feeling? How are you doing all of this? Or, well, you know, like there’s all of that stuff. And then there’s the, how in the world are we going to afford this? What are all the things we need to do to do this? What are we not thinking about? How does this change our plan, right?

And so today, Jason, I thought we’d kind of focus on what you can do before the baby arrives to really take stock of your overall, you know, financial picture, and, you know, maybe give some folks some insight as to the things that you can really impact. Things like tax planning, insurance, savings, your estate planning, right? There’s a lot of things that you can do to address the shifts that are inevitably gonna happen when you add another member to the family, right?

Jason O’Meara:
Right, exactly. And John, I mean, granted, I’m a little closer to the anxiety than you are. Your kids are a little older than mine, so I got a whole different set of anxiety, buddy. But I remember, I remember sitting, talking with my father-in-law when my first, before my first daughter was born at our gender reveal party. And realizing that when I planned to retire is when she’s going to be going off to college. So my, it really did. And as a financial planner, I went, oh, we need to, we need to reevaluate some things.

John Walker:
We may need to reset some expectations, yeah, right? And you know, certainly, maybe one day I’ll get to retire, but you know, it’s really, it really does shift a lot of mindset and a lot of what your financial picture may look like, right? Inevitably, right? And so regardless of what assets you have in place, there’s a, there’s just something meaningful probably going to change in your life. And I guess the best place we often think about starting, Jason, is around just making sure, you know, you, it’s a great impetus to check and review what your liquidity needs are and what access you have to liquidity, right? We, we, we have a lot of families who, you know, they’re getting started and a lot of your kind of thought process has been to longer term plans, right?

Maybe you’ve been saving for retirement, you’ve been saving for a, you know, a new home, you’ve been saving for whatever, right? But this brings a little more immediacy to liquidity needs, right? You know, I don’t think anybody listening would be shocked to find out that having a child can be quite expensive, right? So, the actual process of having the child and then every day thereafter has a dollar associated with it, right? So, so thinking through, what you’re going to need and what, I guess more importantly, what access to the liquidity you have, right?

Jason O’Meara:
Right, right, because that’s the question, right? We always talk about with planning with financial planning, short term versus long term planning, and when you have a baby, you’re in short term world. Like you’re in short term planning world, you know, where you said, where’s the baby going to sleep? I don’t think I realized how expensive furniture, baby furniture can be, you know. So, you know, getting the right equipment, getting the right, you know, diapers, changing tables. You know, cribs, everything you may need, car seats, car seats was another one. So there’s a lot of upfront expenses, and now maybe some of those things will be covered in the baby shower, you know, it takes a village, you can get your family to splurge and help out.

But if you don’t have that available, you need to be planning on how to do that in the most cost effective way. Now, one thing I’m going to say this just in case somebody’s listening is apparently, pregnant and currently expecting their first child, every car seat on the market is safe. They, they, they’re all safe, right? So you don’t have to get the top of the line special one because you think that’s gonna protect your child more. They all have to, they all have to, you know, safe ratings, right? But the point is you have to live within your budget. You know what you’re, what you’re bringing in each month. You know what your current expenses look like, and you have to be within your budget, you know.

John Walker:
Yeah. And that’s really like there is so much that you can’t prepare for, like, let’s just be candid, but you need to think about what can you prepare for prior to the arrival of your, your new family member and where can you get access to those, that liquidity? And so some, some families, it’s, you know, saving extra cash, maybe diverting things to savings that may have gone to other, you know, purposes previously, having, having hopefully an opportunity to increase your actual cash or liquid reserves rather than having to tap long-term investments. It could mean exploring credit facilities like home equity lines of credit and other things that give you emergency liquidity if you need them, right? We don’t, we don’t want to overextend ourselves with that, but being able to tap into, to understand what levers you can pull to get access to liquid cash is really, really kind of a good baseline to, to begin the process.

Then you have to kind of step into, OK, what, what does this do from a protection perspective, right? The birth of a child or adoption of a child is a qualifying life event, right, which allows you to update your health insurance outside of the open enrollment period. So, it’s certainly important to take the time to review what plans you have available, you know, if it’s through an employer, if it’s through the open market, whatever it looks like for your family, you really need to kind of determine what best supports, you know, those presumably very expanded family needs. What does this change and how do you prepare for it, right?

Jason O’Meara:
But you know, I consider weighing out, you know, your deductible. Does that make sense anymore? Should it be higher because maybe it lowers the monthly cost, or should it be a lower deductible, maybe more out of pocket, but you know, you’re going to have some additional medical expenses, right? You want to determine which one fits for you. Another area because we’re talking benefits is you want to review your life insurance. You know, when you were, when you were just single, you, life insurance wasn’t a big deal. Who cares?

Now you have a family that’s relying on your income. It’s important to review that life insurance because if something were to happen to you and you’re no longer here, most, most wanna make sure that their family is taken care of. I know when I had my first, my first daughter, I went immediately out and got more life insurance just to make sure that if something were to happen to me, my kids weren’t, you know, living without because of my absence. I want to still provide from beyond the grave, if you will.

John Walker:
And when it comes to like life insurance, Jason, right, there’s, we, I know how you feel about rules of thumb, but there are some, you know, kind of industry recommendations around sensible starting points for coverage. It’s often, you know, I don’t know, 10 to 12 times your income, you should really determine what debts you have, what your living expenses are, you know, are you anticipating education costs, right? So it is important that you evaluate your term and your, your coverage from, you know, with your specific situation. But generally, a good idea to reevaluate what your insurance coverage looks like. And there’s another one. I know where your head’s going, Jason.

Jason O’Meara:
The one that most people forget about or the least exciting one, but make sure your disability insurance is at an appropriate level, right? Usually seek to replace around 60 to 70% of your income, if you were unable to work because of an illness or an accident or something. Cause if you think about it, I always say this, if you think about it, death is easy. If you die, you no longer incur expenses, and everyone thinks about their life insurance policy, right? But you no longer incur expenses, whereas if you became disabled, you still need to eat, you still are going to incur expenses, and if you just have no ability to earn income, you need to have that insured.

You have to make sure you have the appropriate amount of disability insurance and make sure you know that the right type of disability insurance, you know, if you pay, if you’re the one paying for it, it’s not taxable. If you’re paying the premium, it’s not a taxable, you know, the benefit’s not taxable. Therefore, you don’t need as much, whereas if your employer’s paying the premium, it becomes taxable. So maybe you need to have more. So you’ve got to make sure you understand those little nuances around it. But again, you want to make sure that you’re providing for your family and taking care of them in case the worst happens.

John Walker:
Yeah, absolutely, absolutely. You know, one of the other critical things to consider, and it’s not, you know, necessarily the top line item in a prioritization schedule, but many families start considering how they might like to save for their child’s future. And, you know, we recently did a great podcast that you should certainly listen to around the new Trump Accounts that are available for, for children born between January 1st, 2025 and those to be born by December 31st, 2028.

You know, Trump Accounts are a new opportunity that you should explore. They’re a part of the One Big Beautiful Bill Act, and they kind of are traditional IRA style accounts that allow you to contribute retirement savings and potentially get some benefits from the government to fund future long-term retirement wealth, right, for children. You got to see if you’re eligible. There’s a lot of other things to consider. Certainly, you know, give our, our podcast with Brian Strike, one of our great colleagues here at Mercer, a listen if you really want to understand more. But it’s certainly something that many families that are welcoming new children are thinking about, Jason.

The other big one is whether it’s the parents themselves, grandparents, aunts, uncles, family, friends, anybody is the thought around planning early for education savings for your children, right? And many families are coming to us about 529 plans and how they work. This is at least a time to give a thought to it, see if it’s something that your family wants to add to the plan, and how it may help.

Jason O’Meara:
Yeah, so when, you know, kind of tailing on to my earlier story about how when I wanted to retire, my, I realized my young oldest daughter was gonna be going off to college, and then we had another daughter after that, which really, you know, compounded the problem. But we agreed early on that it made sense to fund 529s for my girls cause I, college is important to me. It’s very important that they go to some level of education.

So we started early contributing to a 529 because the more compounding time you give, the less you have to put in of your own money, right? I want the markets paying for most of their education. So we started off with funding early, and my kids have unique birthdays right around Christmas. My youngest daughter’s birthday is Christmas. They don’t need two sets of toys. So what we told all of our aunts and uncles, all the aunts and uncles, grandparents, whatnot, buy gifts for one, birthday or Christmas, contribute to a 529 for the other. So, you know, my daughters will get money put in from anybody can contribute to a 529, you’re a 529. So it doesn’t just have to be on the parents, you know, the gift of future education to me is one that’s gonna pay dividends the rest of their life.

John Walker:
Yeah, absolutely. And they’ve really expanded, you know, what those withdrawals for. You know, can be used for, right, for qualified education expenses. You know the Secure 2.0 Act really expanded that to include K through 12 tuition, college, vocational programs, even expanded. And if you overfund, right, you know, up to $35,000 in unused 529 funds can actually be rolled over into a Roth IRA, right? So there’s even, even more additional flexibility if you’re child’s path changes than there was previously.

Jason O’Meara:
And if you do overfund your 529, not only can you, like we said, move up to $35,000 into a Roth IRA, but you can always change the beneficiary to another child who maybe is going off to graduate school and you want to contribute to that, right? Or hold it off until your kids go to college, you know, that there’s, so there’s, you always have the ability to change the beneficiary. So that’s one area to think about because I know a lot of concerns around what if I overfund.

John Walker:
Great, great point, Jason. Yeah, really, really important to note, you know, there is a lot of flexibility now that didn’t exist and, you know, again, may not be the highest priority on the list of to do’s as you’re welcoming a new member to the family, but it, it is a good time to, to consider what, what you may want to do as a part of your plan. Jason, I think the two other big things that we’d be remiss in not talking about, certainly as a, a part of Mercer Advisors who really focuses on this part of financial planning, that would be the tax and the state, you know, implications to adding a new member of the family. I guess we’ll start with tax first. There are some tax planning strategies that actually can help lessen the burden that, that you may face financially. One of the things that’s easy to consider if it’s an option for you, not all plan, plans, employers provide this plan option, but many families consider using a flexible spending account, an FSA, that would allow you to contribute pre-tax dollars to an account that can be used for qualifying childcare expenses, right?

So, it allows you to potentially lower your tax bill, right, by contributing pre-tax dollars. And, you know, for, for higher income tax, you know, households, that can be really, really impactful. You can contribute up to $7500 currently, annually in pre-tax dollars. And so, you know, there’s, there’s limitations on what those childcare expenses are, you should understand if it’s things that you’re going to take advantage of, right? But it is something that could allow you to defer some income, um, that, you know, they, that you didn’t have previously.

Jason O’Meara:
If you’re sending your child to daycare, you can pay the daycare expense out of this account, right? But it is use it or lose it in that year. So, you want to make sure that if it’s $7,500 you want to make sure that your expense is $7,500 or more. You don’t want to, you don’t want to have, you know, put $7,500 in here and then your total childcare bill only rolls out to like $3,500 cause then you wasted, wasted some money there. So, you want to make sure that you’re using it all up, it doesn’t roll over to the following year. So, you want to be very specific and intentional with the amount of money that you put in here.

John Walker:
Really great point. Really great point. Yeah. Understand what it can be used for, if it’s something you’re going to take advantage of, and if, you know, how much you, you should then be, be contributing is, is really great. Jason, one of the other things that adding a member of the family gives you that you didn’t have previously is a new federal tax credit, called the Child Independent Care Tax Credit, that depending on your family’s income and expenses and how much you’re using in the FSA, it’s, you know, there is an opportunity, to have an additional tax credit to reduce your taxable liability again needs to be something that you evaluate with a tax professional because not everyone’s eligible for it, but it can certainly help reduce some of the burden.

One of the other ones is the simple child tax credit, right, which, for 2026 provides $2,200 per qualifying child in a tax credit, which adjusts and modifies down your, your adjusted gross income. There are some phase-outs, Jason, if you’re at a higher income level. So, you know, we need to, you know, again, caveat everything by saying everything here that we talked about is specific to your family situation, but there are some federal tax credits available if you are adding a child to the family. I think, Jason, one of the other things that, gets less talked about, some people are expanding their family through adoption, and that is a different process certainly, but also has some potential tax benefits to help, you know, offset the qualified adoption expenses that you might be facing.

Jason O’Meara:
Because adoption is expensive. It certainly is.

John Walker:
It has a lot of financial considerations. So maybe if you could touch on sort of there’s some new tax credits that are there to support the cost of adoption.

Jason O’Meara:
Yeah, so to help with the, to offset those qualified adoption expenses, again, this is one where we want to work with your CPA to make sure that we’re counting correctly. But for 2026, that federal adoption tax credit is up to $17,670. That’s tax credit. So that, that goes towards your tax bill. That’s not just taking off of your income. So, you know, there are some phase-outs cause it’s based off of your modified adjusted gross income.

So, if you, in 2026, you, the phaseout begins around 265,000 dollars-ish and it’s phased out completely by like 3050. Roughly, right? So, you wanna make, so if you’re below that range for your family to modified adjusted gross income, this is something, and you’re adopting, this is something you’re gonna want to make sure your accountant is aware of and make sure that they are, you know, counting calculating those qualified expenses. And the other aspect is, you know, if you’re adopting a child with, with special needs, right? You may also qualify for additional tax benefits even if they, you know, even if you have limited out-of-pocket adoption expenses. You know, work with your CPA. You have to file a Form 8839, which is federal tax return, but the bottom line is we want to make sure that from a tax perspective you’re getting any credit that is due to you. You are doing something selfless. You’re adopting a child who otherwise wouldn’t have, basically wouldn’t have a family. You deserve to get everything you could possibly get as a thank you from society.

John Walker:
Yeah, I think it’s just important to note, right, we’ve underscored, countless times here how, how expensive this can be, right? Adding, adding a child to the family. So just make sure you know about all the potential tax offsets that are available to you because, you know, it can help in many ways or in some ways, at least reduce that burden. Jason, the last thing, and I think it’s a really essential step that is either often skipped or at least delayed for many first-time parents and something they think that they can deal with, you know, they don’t have to worry about yet, they can deal with it later. But that’s revising your estate plan. As you welcome a new member of the family, right?

And, and it’s often skipped because of emotional reasons, costs, whatever it may be, but before your child arrives, you really need to make sure that you have a legal document, whether it’s a will or a trust that designates a guardian and outlines how your assets will be distributed in the event that something were to happen to you or your partner or spouse or both of you. It’s really important that you intentionally decide who will make the, who will raise your child in lieu of you, because without some sort of formal documentation, a court will make that determination. And for many, many families, that is not a process that they’d like to experience.

Jason O’Meara:
Exactly, exactly. And one of the areas that I focused on was, you know, when would those assets become available to my child, right? Again, I mentioned I have young kids, I have a 3 and a 5-year-old, right? So, if I were to pass away, I don’t want to hand a couple million dollars to, so I have my wife and I. I don’t want to hand a couple million dollars to my children, right, from life insurance and other assets, right? So, I want to make, I made sure that we had a trust that would be set up that would manage how my kids would get access to those funds. And to make sure that it didn’t become theirs until I felt they’re at an age where it was appropriate, you know, so you can build these, these estate plans out to be as custom as you want them to be. Prime example, my kids get one third of the money at 30, the other, you know, half of what’s left at 35, and the rest at 40, only because I jokingly said to my attorney, I think most divorces occur in your thirties, so let’s go ahead and keep these assets out so they’re not marital assets, you know, but the reason really was just to protect my children obviously from themselves. I know what I would have done at 21 if you handed me $2 million. I would have the best Lamborghini ever.

John Walker:
Probably not something long term that money would have been gone.

Jason O’Meara:
Yeah.

John Walker:
I think Jay, there’s this kind of illusion that you need to have significant assets to need an estate plan, and we, we spent a lot of time with families kind of talking through why that’s not necessarily the case. And regardless of the assets that you currently have or that you’re projected to have, like you really need to have some certain documents in place to protect and insulate your family, right? As we said, a will or a trust that designates a guardian outlines how your assets will ultimately be distributed, how they can access them. Powers of attorney.

Jason O’Meara:
That is a big one.

John Walker:
Yeah, it’s again, it’s often missed, right? You need to decide who has agency to make your financial decisions, medical decisions, on your behalf in the event that something happens to you, right? And because your family needs that, you know, a living will, medical directives that give your care preferences, right? These are really critically important things at all stages of life, but certainly, you know, worth reconsidering as you, you know, bring someone else into the fold. The other thing is, do not overlook your beneficiary designations.

So, we see this, I mean, this is something we check anytime we’re bringing a new family to the Mercer Advisors group, we are looking at who are the beneficiaries of your retirement accounts, your life insurances, your life insurance policies, your other financial accounts, right? Are things TOD? Who are those people? You know, you may need to update all of those, particularly for assets that would, you know, be transported outside of or transferred outside of your will. You need to make sure that they’re appropriately titled.

So, Jason, I think, you know, kind of just to tie a bow on this and bring it all together, you know, it’s, you can’t do everything all at once. It is a joyful, overwhelming emotional experience to welcome a child into your home, but try to do this in a sensible order, right? Think about your emergency reserves. Think about evaluating all your insurances, you know, life and medical and everything else. Look at your tax situation and determine what, you know, you can do what strategic planning applies to you now, now that things have changed, and certainly making sure that the essential estate documents are in place to protect your family and to give you the discretion to make your decisions, not the court system. That’s, that’s really kind of, you know, if we had to kind of make a checklist, I think those are the big ones.

Jason O’Meara:
Yeah, in that order. I like that order too, right, John, because it’s handle your today. You just had a new baby. Your whole world’s turned upside down. You don’t have to plan all these things out on day one, right? You have time to open 529s. You have time to open Trump Accounts. You have time to, you know, work with your CPA cause that’s a tax, that’s, that’s for April, right? That’s for your tax, that’s for taxes. So, but you need to immediately do the insurance. You have, I think, two weeks. For the first two weeks, I think the baby’s covered under mom’s insurance. And then you have to get the baby on the insurance. You have two weeks to do that. So you know, some of these things are important to handle first, but you don’t feel like you have to cover all of these things at one time.

John Walker:
Absolutely, yeah, prioritize where needed. Some things are more critically important than others, and if you need help, there are resources to support, right? This is certainly something we do here at Mercer Advisors when we’re working with a family who’s going through this joyful experience, right? And make sure that at the end of the day, make sure that your financial plan is built for your growing family. Jason O’Meara, CERTIFIED FINANCIAL PLANNER and Market Leader here at Mercer Advisors. Thank you so much for joining me as always.

Jason O’Meara:
Of course, buddy. Thank you.

John Walker:
And so if you have questions, if you want to learn more about this process, if you’re not sure how it applies to your family or, you know, your extended family, we’re always here to help. Feel free to give us an email anytime at jwalker@merceradvisors.com or jomeara@merceradvisors.com. I’m John Walker, Regional Vice President at Mercer Advisors. Thanks so much for listening to the Your Life Your Wealth podcast. Talk to you next time.

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This presentation by Mercer Global Advisors Incorporated, also known as Mercer Advisors, was intended for general information purposes only. No portion of the presentation serves as the receipt of or as a substitute for personalized investment advice from Mercer Advisors. All expressions of opinion reflect the judgment of the speaker as of the date of recording and are subject to change.