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How to afford parenthood after 40
Just when you thought you could save...Baby furniture! Piano lessons! College! You need a plan.
July 18, 2005: 4:45 PM EDT
By Jean Chatzky, MONEY Magazine

NEW YORK (MONEY Magazine) - Q. You're a couple in your late forties. Which of the following are you most likely to brag to friends about at your next dinner party?

A) Your kid's grade point average in his first semester of college
B) The 39 you shot on the back nine last Saturday
C) The new sports car you finally allowed yourself to buy
D) None of the above -- you're too busy changing your three-year-old's diapers to have dinner parties

For more and more boomers, the answer is D. The ranks of middle-aged parents of toddlers have swelled lately. According to the National Center for Health Statistics, birth rates for 40- to 44-year-old women increased 32 percent from 1980 to 2002, and another 6 percent from 2002 to 2003 alone.

Result: The number of boomers in their forties and early fifties still in their most active parenting years has skyrocketed, and they're facing financial challenges the likes of which people their age have never known.

Significant costs

When you become a mid-life parent, the most immediate questions are not likely to be financial. As in, Can my knees endure playing with an inexhaustible three-year-old? Or, How can I steer my friends' conversations about college admissions back to what interests me, which is whether my child will get into the right preschool?

The costs involved, however, are equally significant. A wee one can disrupt every component of your financial plan, from how much life insurance to buy to how to design your estate plan.

Think of the double whammy of being hit with college expenses and retirement at the same time. Or of maintaining health insurance for your family after the age you personally would qualify for Medicare. These and other issues are only magnified when, as is often the case, a late-in-life child comes in a second marriage and you already have older kids.

Jann Blackstone-Ford, a 52-year-old with a preteen in the house (and a 26-and 27-year-old out of it), found so few resources on mid-life parenting that she wrote a book about its challenges, "Midlife Motherhood: A Woman-to-Woman Guide to Pregnancy and Parenting."

"Most of us are used to living day by day. We spend when we have to or want to, we save when we can," she says. "People who have children older don't have that luxury. When you're an older parent, organization and planning are key." So what do you need to do?

Understand your competing priorities

Presumably, if you decide to have a child after 40, you'll be on firmer financial footing than when you were 25. The downside is that you could get hit all at once by three big money sponges: college tuition, retirement and your own aging parents.

Try to calculate these variables before pregnancy (or at least during it), suggests John Rother, director of policy and strategy at AARP.

Of that trio, aging parents is the one most people are least prepared for. A recent Merrill Lynch study notes that 70 percent of baby boomers have not talked to their own parents about their finances.

If that includes you, it's time to have a straight-shooting discussion with your parents about their long-term plan. (For more guidance, see "Have 'The Talk' with Your Parents" from the April issue of MONEY Magazine.)

Invest for retirement first, college second

"There's no financial aid for retirement; there's lots of financial aid for college," says Kalman Chany, author of "Paying for College Without Going Broke."

The good news is that older parents have more flexibility when it comes to satisfying both goals at once. You can load all your savings into retirement vehicles -- 401(k)s and IRAs, for example -- knowing that at age 59 1/2 you can decide whether you want to use it for tuition or retirement without facing that 10 percent early-withdrawal penalty in either case. And because college financial aid formulas don't count retirement accounts, that money won't damage your eligibility.

Tweak your estate plan

It's tempting not to think about it, but when you have children at an older age, you risk dying while they're relatively young.

When you're selecting guardians, look to nieces, nephews, even your own older children, says Christopher Fay, a financial adviser with Smith Frank & Partners in Dallas.

Also, don't put too much money in the hands of your kids before they can handle it. Think carefully about how much you want them to receive and at what age, and establish trusts that pay out over time.

Consider extending your life insurance

"We don't necessarily find that our clients need more insurance," says Fay. "They just need it to last longer."

Say you had a baby at 30 and purchased a 20-year level-term policy -- then had another child 10 years later. When your initial policy runs out, your second child will be only 10.

If you want coverage until you're 70, a simple term policy with the option to convert to a permanent (cash-value) policy (which allows you to keep your insurance in the event of a health scare) is best, says Glenn Daily, an insurance consultant in New York City.

"Right now, 30-year policies are overpriced -- buy a 20-year term policy," he says. "Chances are, you'll stay in good health and you can buy a 10-year term policy then. But if you're not, you'll either pay the higher term rate or you'll convert."

Bottom line

You might have to rethink your retirement (see the table below) and save more, but you won't have to work until you're 90 just because you waited to start a family.

"You don't have that much time to make mistakes," says Blackstone-Ford, "but having a child in your forties is great because it keeps you young."

For more financial tips for expecting parents, click here.  Top of page

Childproof your retirement
If you have a baby at 40, can you still retire at 60? It just got a lot more difficult. "You've narrowed the time frame, so if you retired at 60 your child would be smack-dab in the middle of college," says Greg Reed, a financial planner with Smith Frank & Partners in Dallas. "It would mean saving $3,000 a month toward retirement." That seems a little ridiculous. Reed ran the numbers for a hypothetical couple and came up with this advice: Retire at 67, when full Social Security kicks in. [1] Here's the plan.
Current age: 40 | His income: $90,000 | Her income: $35,000
Combined retirement savings: $150,000
New expense Cost per month What the expert says
Increased 401(k) or IRA contribution $1,000 (up from $520) This should produce $70,000 in annual post-tax income. Retirement savings take priority over college. But in retirements, they'll likely be able to live on 80 percent of their current spending because housing, retirement and college costs will be history.
College fund $365 Savings will amount to $60,000 in today's dollars In 18 years, college will be even more expensive. But once their child leaves the nest, they should funnel this money into retirement to boost savings.
Life insurance (Father) $122 20-year policy worth $1 million The mother must be able to at least maintain a home while the child is in school. A million-dollar policy is appropriate.
Life insurance (Mother) $53 20-year policy worth $500,000 Single-parent costs like child care will crop up if the mother dies. But the father earns more, so a cheaper policy will suffice.
Increased disability insurance (Father) $104.24 Five years of $4,000 a month tax-free It's good to have at least a five-year benefit so a short-term disability doesn't torpedo their savings.
Notes: [1] Assuming annual salary increases of 3.5 percent, a 6 percent annual increase in college tuition and returns of 8 percent on college and retirement savings (7 percent on retirement after age 67).

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