When Everyone Is Counting on You - Page 2 of 3

When Everyone Is Counting on You

she loses her job. The emergency fund should be kept in either a savings account or credit union—a place where money can earn interest but still be accessible. Creuzot recommends the no-fee ING Direct Orange Savings Account, which offers a variable 1.8% annual percentage yield.

Another part of the foundation is having adequate disability and life insurance as well as a will. “Risk management is extremely critical for a single mother,” says Creuzot. “If the woman becomes sick, disabled, or dies prematurely, she has a dependent, so she’s got to make sure that all the ‘what ifs’ are taken care of.”

Thompson has a $25,000 life insurance policy through the university, and she doesn’t have a will. Williams suggests Thompson increase her life insurance to at least $150,000, which will give her enough to pay off funeral expenses, the mortgage, and other debt, with a little money left over for James.

With the foundation in place, single mothers can begin saving for retirement and their children’s education. “Adoption is a growing trend,” says Creuzot, “but what’s more common is single motherhood achieved because of divorce, and most divorce decrees don’t speak to college costs.” Williams suggests concentrating on saving for retirement first, advising single mothers to put as much as possible into their 401(k) plans and Roth IRAs. “Women have to look at this as funding for the long term,” Williams says. “Single mothers will have three to five different jobs before they retire, but instead of rolling over their 401(k) accounts, they often withdraw the money and spend it.”

In terms of investing, Williams recommends a growth and income asset allocation, where the objective emphasizes modest capital growth with a focus on generating income. The risk tolerance for this allocation is moderate, with an investment time horizon of five years. This portfolio mix includes 25% large-cap growth, so that the focus is on large, mature companies that are still growing. This allows for an increase in assets over time with moderate risk.

While experts estimate that parents would have to save $200 a month from the time their child is born to send him or her to a state school for four years, that figure may be a bit unrealistic for single mothers. Creuzot suggests that single mothers determine how much they can afford to save and set the money aside in a 529 plan. These state-operated plans have investment features similar to mutual funds or variable annuities. And as long as the money is used for college-related expenses, you won’t pay taxes on interest gains.

Finally, single mothers must do estate planning. The federal estate tax, which must be paid after death on estates worth $1 million or more, is something many people don’t consider. “If you add up the value of your home, life insurance, and other assets, it isn’t hard to get to $1 million,” says Creuzot. “If you’re married, you get a marital deduction that defers the estate tax, which starts at 41%, until the second death; for a