Planning Needs of Single Parents by Emily Murphy, CFP®Submitted by Moller Financial Services on April 18th, 2019
Planning Needs of Single Parents by Emily Murphy, CFP®
While many people don’t initially plan on raising a child alone, life happens. And it happens to a lot of people. According to Pew Research, in the US about one-quarter of all children are living with a solo parent. I found myself there five years ago with my then two-year old daughter. Since then I’ve learned firsthand that single parents face many unique financial challenges and opportunities. Three areas worth special attention are planning for your estate, managing your additional financial risks, and navigating the issue of child support.
(Like a lot financial advice, this blog post assumes the reader has socio-economic privileges like surplus income to save. I want to acknowledge that far too many single parents fall outside this assumption.)
Single-parent headed households often have more complicated scenarios to contend with than a two-parent household when planning for an untimely death. You will need to decide who will be responsible for taking care of your children both physically and financially.
For families without a second parent in the picture, a plan needs to be in place naming the guardian of the minor child and at least one backup guardian. If you do not, the court will make that decision for you according to what they deem are “the best interests of the child”. When there is another parent in the picture, this parent will become the assumed custodial parent in the event of the custodial parent’s death unless a court finds them unfit. If there is a parent who has had little contact with the child but they have not been deemed unfit, the situation could be much more complicated when you die even if you name a different guardian than this parent.
In either situation, it is important to ensure that the money you leave for the benefit of your children is managed prudently and according to your wishes. This can be especially difficult if the children will be in the care of someone with different values and beliefs about money than you. You will need to name a conservator to oversee the finances of the child. This can be the same person as the guardian, but it doesn’t have to be. If you think there is one person better suited to handle the finances and another to provide day-to-day care, it can be a good idea to name them separately. Naming an independent trustee may be an appropriate option if you want to put specific restrictions on the use of the money. For example, a parent may restrict a child’s access to large sums until they reach a certain age or milestone in life.
These situations require an experienced attorney and it is well worth the investment to set up the appropriate documents rather than trying to do it yourself.
A one-income household is subject to a higher probability of losing all household income than a two-income household. When there is not another adult who could work if needed, the risk to the family is even greater. For this reason, single parents often require a very strong financial safety net to manage a worst-case scenario situation.
An adequate emergency fund is essential. The conventional advice of “three to six months of expenses” may be too low depending on the stability of your job, your health, and your other sources of income. When creating an investment portfolio, a fairly conservative allocation may be appropriate. Only the investments you don’t have a risk of needing in the short term (less than 5-10 years) should be invested in the stock market, which means a larger portion of the portfolio should be in more stable assets instead of equities until an adequate safety net is firmly in place.
Adequate disability insurance is crucial for a working parent as well. What would happen if you were unable to work due to disability or illness – do you have enough in your emergency reserves to get you through at least six months? If not, short-term disability insurance is probably needed. Long-term disability insurance is likely needed as well if other assets aren’t enough to sustain your family for the long term.
The subject of child support may seem outside the realm of “conventional” financial advice, but I don’t think most financial advisors would hesitate to bring up a discussion about any other (tax-free!) income source.
It has been my observation that financially successful custodial parents who have another parent in the picture often do not pursue child support. Sometimes this is the best decision for the family’s physical safety and emotional health. But in my experience, the reasons financially successful custodial parents give for the hesitation to pursue child support include guilt, wanting to avoid confrontation, and being too busy.
The spirit behind child support, at least according to the United Nations Convention on the Rights of the Child, is that a child is entitled to support from both parents and shouldn’t have to endure a decreased standard of living because his or her parents are not residing in the same house. I think knowing this framework can be helpful in deciding if this is right for the family.
In Illinois, even if the custodial parent makes more money than the non-custodial parent, they will receive payments from the other parent provided he or she has an income source or is able to work. In addition to base support, the non-custodial parent is obligated to pay a portion of child care, medical, and extracurricular activity costs. A consultation with a lawyer is, again, a good investment to understand your options and the process.
Even a few hundred additional dollars saved each month during a child’s lifetime can be the difference between having to take out student loans or graduate from college debt-free. It can mean better tutors and extracurricular opportunities. Including this potential income stream in the financial plan can give you a better idea if it is worth pursuing the issue.
These three areas certainly aren’t exhaustive, but as an unmarried parent it often feels like financial advice is tailored to either a married couple or a child-free single person and overlooks families in situations similar to mine. Every person and family situation is different, and our goal is that the financial advice we give is too.