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Money Makeover

Expecting a baby and some financial changes

With their first baby due in October, Heather and David Vigorito wanted to get a long-term plan in place for their personal finances. With their first baby due in October, Heather and David Vigorito wanted to get a long-term plan in place for their personal finances. (Josh Reynolds for The Boston Globe)
By Lynn Asinof
Globe Correspondent / May 30, 2010

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Online calculators now estimate that it costs about $250,000 to raise a child to the age of 18. But Heather and David Vigorito didn’t need to consult a calculator. Having listened to their friends with kids, they already know that the arrival of their first child — due Oct. 17 — will change their budget priorities.

So they decided to do some serious planning before their bundle of joy arrives. With lots of friends to provide hand-me-downs, they weren’t worried about affording the car seat, crib, or baby clothes. Instead, they wanted to focus on long-term financial needs such as life insurance, college savings, timing the purchase of a bigger home, and funding their retirement.

To get some professional help, the couple — married just a year — applied for a Boston Globe Money Makeover. “Neither of us is a money person,’’ Heather explained in her application. And because they live well within their means, they don’t spend a lot of time budgeting.

However, with a baby on the way, she said, “It is time to become ‘experts’ on our financial situation.’’

Working with fee-only financial adviser Cheryl Costa of AFW Wealth Advisors, the couple started by pulling their numbers together. That meant not only adding up assets and liabilities but also charting cash flow.

Heather, 36, had to figure out how to access information about her teacher’s pension, which comes from her special education job with the state. David, 39, has fashioned a career from his chess expertise and needed to calculate his earnings from tournaments, teaching, and writing.

When they sat down with the Natick-based adviser, they got high marks for living within their means and saving on a regular basis. But when Costa ran their retirement projections, it was clear that even without a baby, the couple would have needed a more disciplined approach to savings.

Taking both Heather’s pension and David’s Social Security into account, Costa’s calculations showed them running short of money by the time they hit their mid-70s.

The problem was that the Vigoritos had modest savings with just $58,000 allocated to retirement. Even if invested aggressively for growth, that’s just not enough to make up the difference between combined pension and Social Security payments and what it will cost them to live in retirement, Costa said.

“Why are our annual expenses $200,000 a year when we’re in our 70s?’’ David asked as he looked at Costa’s projections for 2040 and beyond.

The reason: an annual inflation rate of 3.6 percent factored into the projections, Costa said. To keep pace, she said, they need to start putting away an additional $400 a month and investing it for growth.

Coming up with that amount was doable, since the couple had a cash surplus of about $650 a month. But with a baby on the way, Costa said the couple also needs life insurance. While Heather has a minimal $5,000 policy through her employer, that’s not enough for a growing family, Costa said.

She recommended that Heather take out a $1 million, 25-year, level-premium term policy, which Costa estimated would cost about $760 a year, or roughly $65 a month. A $750,000 policy for David would cost about the same.

Factor in both the retirement savings and the insurance premiums and that monthly surplus dwindled to just $120. However, all that money plus a bit more is needed if the couple wants to fund the baby’s college education. To have enough for four years at a school like the University of Massachusetts starting in 2028, Costa said, the couple should begin saving $270 a month once the baby is born.

Any gifts from grandparents or others might reduce that amount, she said.

“Well, it will be the first grandchild for both sets of grandparents,’’ said David.

Costa said one relatively painless way for grandparents to help is by getting credit cards linked to Fidelity Investments’ state-sponsored 529 college savings plans. The Vigoritos would need to open a 529 plan account, but once established, an amount equal to 2 percent of purchases made with those credit cards would go directly into the account.

All the extra savings will make it tougher for the couple to afford a move to a larger home. David currently works from what will soon be the baby’s room, and the couple is already thinking about school systems. Noting that mortgage rates could fall as low as 4.5 percent this summer, Costa suggested that the couple spend some time going to open houses and figuring out how much they would actually get for their two-bedroom condo.

“Get some feel for the market,’’ she said, noting that will help them balance the house purchase against competing demands.

Other items on the pre-baby to-do list include some basic estate planning.

“Right now, you just need simple wills, health care proxies, and powers of attorney,’’ Costa said, noting that the will is the document that will specify guardianship of the baby if something happens to them. Heather should also make sure she picks up the disability insurance offered through her workplace.

Costa’s recommendations contained no surprises, Heather said, but they put actual numbers to the questions that the Vigoritos had been pondering.

“This is helpful,’’ she said. “You can easily fool yourself into thinking you have lots of time.’’ After all, neither she nor David have plans to retire for close to 30 years, and the baby won’t be heading to college for at least 18, she said.

But with Oct. 17 fast approaching, they have both got a new understanding of the importance of long-term planning.

To be considered for a Money Makeover, fill out the application at the “Your Money’’ section of boston.com/business, or call 617-929-2916.

Heather and David Vigorito
Goal: Getting their finances ready for the arrival of their first child. Married for less than a year and expecting their baby on Oct. 17, Heather and David wanted some professional help to make sure they were on track with their long-term financial planning.

Recommendations from fee-only adviser Cheryl Costa:
■ Kids are expensive, but saving for retirement should still be the couple’s top financial goal.
■ Given their ages and limited portfolio, investments should be primarily put into equities to provide growth.
■ Basic estate planning documents — wills, health care proxies, and powers of attorney — are essential.
■ A new house purchase has to be balanced against competing needs for cash, which include life insurance, retirement, and saving for college.