Sometimes life gets in the way of our long-term financial goals. This is especially the case with our goal of saving for retirement. In our early years, retirement is such a long way off, it’s easy to let the “other stuff” of life soak up money we had originally earmarked for our golden years. While most of us have a plan to start early, to set aside 15% of earnings each year, to invest well and to enjoy the benefits of compounding growth, sometimes it doesn’t work out quite so neatly. We look up and suddenly realize, “I’m old!” And we realize that retirement isn’t that far away and we’re behind with our savings. In this article I’ll make the case that if this describes you, there’s still hope.
Saving for retirement usually takes center stage in any comprehensive financial plan. Sure, there are other things to save for including an emergency fund, educating children, weddings, cars and other big ticket items such as luxury travel and even second homes. But for most savers, these goals are (or should be) secondary to saving for retirement. After all, some of these secondary goals for which we save are discretionary and most of them can be at least partially funded with debt. Not so with retirement; that ticking clock says we can’t work forever and most lenders won’t finance your retirement. When we finally retire, the money we’ll need to fund our spending in retirement must be there…the earned income spigot will run dry. In order to pile up the capital you’ll need, you must save during your working years. And you’ll need to save a lot! We estimate that you’ll need to have accumulated approximately twenty to twenty-five times your desired annual retirement draw in order to avoid a significant reduction in your lifestyle in retirement.
Back to our good intentions. What happened to get us behind? If you’re like me, you’re amazed at how expensive life can be. Especially for those who choose to raise a family. Raising a family can have a 20+ year impact. According to the US Department of Agriculture, a child born in 2015 to a middle income family will cost parents $233,610 to raise to age 17. Approximately $13,900 per year. The cost of school—private school, college, grad school—is not included in this calculation. Not surprisingly, many families find that during the 20-25 year period when their children are dependent, saving aggressively for retirement simply gets crowded out. The good news is that if all goes well, most of us will eventually be empty nesters. And this is our second chance at saving for retirement.
This is the time to save. For many, the empty nest years coincide with peak earnings years. Take the money you were spending on your children (a lot of money) and save it towards retirement. Be deliberate. Increase contributions to your employer retirement plan and open a brokerage account. Establish an accumulation plan and monitor it. Importantly, automate all of this with monthly deductions from your paycheck or from your checking account. Do this before you find other ways to spend this money and trust me, you WILL find plenty of other ways to spend this money. Lifestyle Creep, also known as “keeping up with the Joneses” can soak up that discretionary income faster than you can say kitchen re-model. Having become an empty nester a few years ago, I know what it’s like to have some new-found money. Money for vacation, a new car, a home renovation, a new home…you see where I’m going. It’s easy to trade up lifestyles to a more expensive version. Don’t let yourself make that mistake. First determine an appropriate amount to save for the future and only then will you know if a higher level of discretionary spending is prudent.
There are a few items you need to take into consideration that can derail your plans during this crucial savings period.
Our Health: Becoming an empty nester often coincides with the realization that we’re not far from becoming grandparents! Indeed, we’re getting along in age. Poor health or becoming disabled to the extent you are unable to work can significantly alter your retirement plans. Know your risks and manage them accordingly. Review your disability coverage. Check with your doctors. Take steps to mitigate health concerns over which you have control. When we were young, an apple a day kept the doctor away. According to my doctor, I now need a multi-colored diet, exercise, yoga, meditation and an apple.
Our Kids: Sometimes the nest takes a long time to really become empty. Our children may remain dependent for much longer than we anticipated and this may continue to impact our savings. The current generation of young adults are sometimes referred to as the Boomerang generation. Some children leave the nest only to come back later. Studies show young adults coming back for monetary support, or never leaving, is more prevalent now than ever before. As parents, it’s important to find a balance and to practice good communication with our young adults. In some cases it is important to draw the line.
Our Parents: Many of our clients find themselves sending off the kids only to take on the role of caregiver. Debbie Taylor has written a number of articles on this subject and you can find them on our website. Two articles you may find useful are Three Types of Help and One Last Gift. I’ll simply say here that the health (physical and financial) of our parents is a very real consideration. Communication is key. Although it can be an uncomfortable conversation, we encourage you to seek information from your parents (or others who might depend on you) regarding their health and financial plans.
So as you prepare to become an empty nester, remember what an impact these years can have on your retirement years if you plan well. Make a plan (we can help), save your newfound income, say no to lifestyle creep, stay healthy, enjoy your children and parents and watch your retirement savings grow.
This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.