Women with young children often discover that child care costs eat up much of what they earn. If they’re married to a big earner in a high tax bracket, they could lose most of the rest of their wages to high marginal tax rates.
But advising them to quit working is short sighted, two Certified Financial Planners suggest in the most recent issue of the Journal of Financial Planning.
Jerry A. Miccolis and Marina Goodman note in “Advising Married Women on Investing–in Themselves” (may be restricted to FPA member access only) that child care costs usually drop when the kids enter school while the mother’s income typically rises over time. Stopping out, meanwhile, often leads to lower lifetime earnings. The authors suggest women view those early years, when they’re working for not much financial gain, as an investment in their future–sort of an extended internship, if you will. They write:
“[W]ork experience leads to career advancement, which could have a quantum-level impact on her financial future. Say a woman spends five years working while getting no financial benefit due to taxes and child care costs. Her youngest then enters school and suddenly child care costs plummet. After five years of experience, she may get promoted and now her income may be $75,000. If, instead, she was just starting out at that point, she would be earning $50,000. (We’re ignoring inflation in this simple example—it would, of course, merely magnify the effects.) The difference is not $25,000. It is more like being an entire professional level higher for the next 30 years. Over the course of a career it can be the difference between middle management and eventually being in the C-suite.”
The authors note that “A woman’s ability to earn a decent salary is the most comprehensive insurance policy she can have.” Staying employed, even part time, and keeping up any professional credentials can help her family if her partner loses a job, becomes disabled or suffers a business setback. It can also be an insurance policy for her in the far greater risk of divorce:
“Even among upper-income families, many women would still experience a significant decline in lifestyle upon divorce, especially if they have no means of supporting themselves. The risk that a woman will get divorced is greater than the sum of the risks of her husband’s premature death, disability, or just about any other financial catastrophe all put together.”
This information may be most relevant for the kinds of women financial planners are most likely to advise: college-educated women with careers, rather than jobs. The price for stopping out may be less if you’re in a low-wage, low-skilled job rather than one where significant financial advances are possible. But any parent contemplating time away from work should be looking at the longer term financial picture, and those who choose to stay home should make sure they have significant savings to help offset their greater financial vulnerability.
Today’s top story: Turning this year’s tax refund into next year’s savings. Also in the news: Growing your 401(k) at any age, four financial potholes you should swerve around, and what cyberscams you need to worry about in 2014.
How to Turn This Year’s Tax Refund Into Bigger Tax Savings Next Year
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How to grow your 401(k) at any age
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Dear Liz: I read with interest the question you received from the widower who thought he should inherit from his father-in-law, despite the death of his wife. Your answer was great, but it got me thinking about the mind-set that makes someone even think to ask the question. It’s obvious that the asker and his late wife clearly lived their life expecting to inherit a large amount of money. Which leaves unasked, how did they live and what did they save on their own? Did they take vacations instead of save? Did they not save at all? The bottom line here is that you need to reinforce that there is no “sure thing” in expected inheritances and encourage people to amass wealth on their own. Someone else’s money is someone else’s money, and even if he intends to leave it to you, an illness, a lawsuit or some other loss could wipe out anything he meant you to have.
Answer: People who expect an inheritance to save them from a life of not saving are courting disappointment.
About half of those who die leave less than $10,000 in assets, according to a 2012 study for the National Bureau of Economic Research. Many failed to save adequately during their working lives, but even those with substantial assets can find their wealth eroded by longer lives, market setbacks, chronic illness and nursing home or other custodial care.
Hopes of an inheritance also can be dashed by remarriages, poor planning or both. For example: Dad dies without a will and Stepmom inherits the bulk of the estate, which she gives to her own kids. Or Mom thinks she’s tied up everything in a trust, but her surviving spouse figures out a way to invade the principal. Or Grandma gets victimized by a gold-digger or a con artist, leaving nothing but hard feelings.
Most of those who do inherit don’t get fortunes. The median inheritance for today’s baby boomers is $64,000, which means half get less, according to a 2010 study from the Center for Retirement Research at Boston College.
So you’re right that the best approach for most people is to prepare as if there will be no inheritance, since if there is one, it probably won’t be much.
Dear Liz: I just received my tax forms from my employer for last year. I was originally a W-2 employee, paid hourly, as a receptionist. But it seems that at some point during the year, my employer changed me to a 1099 employee without telling me or having me fill out paperwork. After researching the characteristics of a 1099 employee, I found I do not qualify at all. I am upset that I will have to pay taxes on this income, since I thought they were being withheld from my pay. Do I have any recourse?
Answer: Your employer has put you in an impossible situation. If you tell the truth, you’ll tip off the IRS to the company’s deception, which could put your job in danger. If you go along with the lie, you’ll have to pay your boss’ share of taxes in addition to your own.
“The good news is the IRS is really busy and probably won’t [audit your employer] for a couple of years,” said Eva Rosenberg, an enrolled agent who runs the TaxMama site. “By then, you should have a better job elsewhere.”
To fix this, first report your income from this job as “other income” on line 21 of your 1040 tax return, Rosenberg said.
If you got both a W-2 and a 1099, you can use IRS Form 8919 to pay only your share of the Social Security and Medicare taxes. You’ll pay 7.65% instead of the 15.3% you normally would pay with 1099s, Rosenberg said. You’ll have to select a “reason code” for why you’re using the form. You can use code H, which says that the amount on the 1099 form should have been included as wages on Form W-2.
If you got only a 1099, you’ll need to fill out Form SS-8 to explain why you’re an employee, not a contractor, Rosenberg said. Then use Form 4852 as a substitute for your missing W-2. Use the data from the last pay stub that shows your year-to-date withholding as a W-2 employee so you can get credit for those taxes paid. This process is complicated but is the approach a tax pro “would and should use” when an employee is misclassified as an independent contractor, Rosenberg said.
The forms you’re filing will alert the IRS to your company’s chicanery. Some employers pretend that their employees are independent contractors as a way to reduce the company tax burden and perhaps dodge new health insurance requirements. It’s a scam that tax authorities are keen to uncover and penalize
We’re richer than we were before the recession, according to a new report by the Federal Reserve. The net worth of U.S. households and nonprofit organizations is now a record $80.7 trillion, 14% higher than last year. The previous peak in 2007 was $76.59 trillion in today’s dollars.
If you don’t feel wealthier, though, you’re not alone. Most of the gains went to the country’s richest households, and older people saw bigger wealth increases than younger people. That doesn’t bode well for consumer spending, economists said, since younger and less wealthy households are more likely to spend their gains. An article in today’s Wall Street Journal includes this quote:
“Wealth inequality…has increased over time,” said William Emmons, an economist at the Federal Reserve Bank of St. Louis. “So, there seems to be a disconnect: There are big wealth gains, but not much follow-through on consumer spending.”
Another study by the Federal Reserve Bank of St. Louis found that the average family headed by someone under 40 has recovered only about a third of the net worth lost during the financial crisis and recession, while the average wealth of middle-aged and older families is about where it was prior to the crisis.
Today’s top story: How to choose between increasing your savings or paying down debt. Also in the news: What financial risks Boomers need to consider, how to file your taxes for free, and what recourse you have if a credit report error has hurt your score.
Should You Increase Savings First Or Pay Down Debt?
Making the smart decision.
Financial Risks Boomers Should Consider in Retirement
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Can I Take Advantage of the Student Loan Interest Tax Deduction?
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Today’s top story: Why military families are at an increased risk of identity theft. Also in the news: What Millennials can teach Boomers about financial planning, the most important thing on your credit report, and how to leap over savings hurdles.
Military Families Remain Easy Prey for ID Theft
Military families have their information stolen at twice the rate of regular consumers.
What Gen Y Can Teach Boomers About Financial Planning
Millennials are more financially conscientious than one might think.
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5 Huge Hurdles to Saving and How to Avoid Them
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Ask Michael Hedlund, an Oregon law school graduate who repeatedly failed the bar and then went to work as a juvenile counselor. A federal appeals court decided he didn’t have to pay $53,000 of the $85,000 in student loans he still owed.
Or Janet Rose Roth of Nevada, who was freed from over $95,000 in federal student loans even though she was employed for most of the time she owed the money and never made voluntary payments on the debt.
Or Carol Todd, who dropped out of the University of Baltimore School of Law and was allowed to erase nearly $340,000 in education debt. A bankruptcy judge ruled her Asperger’s syndrome made it impossible for her to hold a job that would allow her to repay the loans.
These three court decisions, all made within the past two years, challenge many misconceptions about who can and can’t get relief in bankruptcy court.
The cases have something else in common: the debtors didn’t, or couldn’t, pay for help. Roth represented herself in court while law firms represented Hedlund and Todd in their appeals pro bono, or without a fee.
My Reuters column this week (“Bankrupt? How to get student loans erased“) discusses how few borrowers actually try to get their loans discharged in bankruptcy, and whether cost is a factor. You can read it here, and get all my Reuters columns here.
Today’s top story: Where to save for retirement if you make less than $100,000. Also in the news: Financial therapy, the least prepared states for retirement, and a guide to refinancing your mortgage.
Don’t Wait For Obama’s MyRA: The Best Places To Save For Retirement If You Make Less Than Six Figures
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