Social Security benefits don’t last forever

Dear Liz: Can you clear up something for me regarding Social Security survivors benefits? The yearly summaries I get tell me my family will receive payments if I die. But it’s not clear to me how long these last and if they expire when my children are no longer minors. Do payments continue to be made to my surviving spouse as well, and if so for how long?

Answer: Your unmarried children can receive Social Security survivors benefits until they turn 18, or 19 if they are still attending high school full time. Your kids can get benefits at any age if they were disabled before age 22 and remain disabled.

Your spouse can get benefits as long as he or she takes care of a child receiving your survivor benefits. Your spouse also can receive widow or widowers benefits as early as age 60 (or 50 if disabled).

The amount of the benefit depends on your average lifetime earnings and is estimated on the annual Social Security statement you get. The more money you make before you die, the greater the benefit.

For more information, SSA Publication No. 05-10084 is available on the Social Security Administration website at www.ssa.gov or by calling (800) 772-1213.

Planning a family? How to prepare financially

Dear Liz: My wife and I are planning to have a child in the next couple of years, and I realize that I have no idea how to go about preparing for that financially. How much cash should new parents try to have available? What else should we be considering?

Answer: Congratulations in advance on your entry into the great adventure of parenthood. The most important thing to know is that you can’t predict what’s ahead, financially or otherwise.

The U.S. Agriculture Department estimates that it will cost middle-income parents nearly $300,000 to raise a child to age 18. But your costs could be a lot less if you’re particularly frugal, or a lot more, particularly if you have a high income, plan to pay for private school or have a child with special needs.

You can get some idea of what to expect by using the Agriculture Department’s new calculator at www.cnpp.usda.gov/calculatorintro.htm.

Your annual food, clothing and healthcare bills typically rise $3,000 or more with each child. You also may opt for a bigger home or car, which can add to the bill. Child care and education are other considerable expenses.

Then there are the set-up costs. The authors of “Baby Bargains,” one of my favorite books about preparing for a child, say you easily can spend more than $6,000 just on equipment such as strollers, car seats, maternity clothes and nursery care. If you’re smart, however, you’ll try to spend a lot less, buying or borrowing used furniture and selecting well-reviewed, midrange brands of strollers and car seats rather than status brands.

You’d be smart to start trimming other expenses now and saving the difference, so that you have a fund to pay these start-up costs and so that the added expenses of a child don’t push you into debt.

If one of you is planning to stay home with the baby for an extended time, consider starting to live on one income now and banking the other.

Money troubles? Stop bailing out your kids

Dear Liz: My husband and I are having a rough time making it from paycheck to paycheck. We make pretty good money. We have four children and end up helping them every month. We cannot seem to make it without going in the hole in our checking account. Could you please help me with what we should do?

Answer: As writer Erica Jong once said, advice is what we ask for when we already know the answer but wish we didn’t.

You know what you need to do: Cut off your children (assuming they aren’t minors, of course). If you can’t make it from one paycheck to the next, you’re in no position to help anyone else. Your children may not know the financial straits you’re in, or they may not care; either way, it’s up to you to close the Bank of Mom and Dad.

Once that financial spigot is shut off, you’ll need to look for the other leaks in your financial system. Track where your money is going using personal finance software such as Quicken, online tools such as Quicken Online, Yodlee or Mint, or a notebook and a pen.

If you’re still spending more than you make, you’ll need to find ways to cut back so that you not only don’t go in the hole but are putting aside money each month. You need to save for retirement and for an emergency fund, among other goals.

To do all this, you’ll need to use a word that apparently hasn’t been given enough of a workout around your home: “no.” “No, we can’t help you.” “No, we’re not going to buy that.” “No, I’m not going let my finances be in chaos because I can’t say ‘no.’ “

Should I tap a child’s Roth IRA to pay for tuition?

Dear Liz: My teenage daughter has a modest amount in a Roth IRA that has only a very small gain. I am thinking about using the principal on her private high school tuition so that the account is not considered when she applies for college tuition aid. Is this shortsighted?

Another factor is that I have inherited part of the estate of a relative. Although the transfer isn’t finalized, I probably will get the money during the same year that will be used to determine the financial aid for her first year in college.

Would she be better off if I left the Roth alone and used the inheritance? Or should I reduce the funds in her account?

Answer: Leave that Roth alone!

Retirement funds aren’t included in federal financial aid calculations. And it’s an awful idea to use retirement funds for educational expenses in any case.

Left alone, even a modest sum in a Roth can grow substantially, particularly because it will be 50 years or so before she reaches retirement. In that time, a $5,000 balance could grow to nearly $235,000, assuming she averages 8% annual returns.

Your inheritance will affect your daughter’s financial aid package, but perhaps not by as much as you think. The federal aid formula generally requires you to contribute less than 6% of your “discretionary” assets toward your children’s education.

Are annuities ever a good idea for children?

Dear Liz: I’m a financial planner who liked your answer to the dad who wanted to fund his children’s IRAs but was shocked to see your recommendation (though with caveats) to purchase annuities.

I can’t imagine annuities would be suitable for children under any circumstances. Only under the best possible scenario of assumptions would an investment in an annuity—even a low-cost annuity—beat a reasonably tax-efficient mutual fund over any time period.

As long as money withdrawn from an annuity remains taxable as ordinary income, and as long as ordinary income tax rates are measurably higher than capital gains rates, this will be the case. I fear that brokers will be handing out your article as a tool to sell annuities for kids. To get an endorsement from someone of your reputation has probably helped some of them make this week’s sales goals. Let’s hope not!

Answer: Let’s hope not, indeed. Annuities tend to have high costs and do just one thing efficiently: turn capital gains that would otherwise qualify for low tax rates into ordinary income, which is taxed at a much higher rate.

Most investors would, as you point out, be much better off investing in index funds or other tax-efficient mutual funds.

However, annuities have one advantage that might appeal to this dad: They’re typically not counted in financial aid formulas, according to FinAid.org founder Mark Kantrowitz, because they’re considered retirement accounts. If the children don’t have enough earned income to fund IRAs, annuities would allow him to start saving for their retirements without having to worry about reducing their future aid packages.

This advantage may not outweigh all the disadvantages of annuities. But it’s something the dad should know about as he’s mulling over his options.