I read an interesting post by Michael Kitces today who writes for financial advisors on his blog, titled “Why The Empty Nest Transition Is Crucial For Retirement Success.” Not really sure why it caught my eye but the actual body of the article is pretty interesting (a lot of his articles are). Instead of the usual upholding of ideal tenets of saving for retirement (i.e. start early preferably in your 20’s, save at least X% of your income consistently through your working years), Michael Kitces is approaching the topic more matter of factly, which is to say “hey let’s be real, most people aren’t going to save for retirement, especially while they have kids to care for under their roof, so let’s instead focus on playing catch-up after those kids have gone off to college” (my paraphrase). It’s a refreshing perspective and likely to give a lot of parents hope, because the reality is that a lot of people are saving little to nothing for retirement during the child-rearing years. I can think of many families I know who are currently living paycheck to paycheck raising their kid(s) and foregoing their own retirement savings. I usually give them hope by telling them to mooch off their kids when they’ve grown. ?
When you turn 50 years old, the government allows you to play catch-up when it comes to retirement savings. For 2016, you can contribute an extra $1000 to a Roth IRA or traditional IRA and an additional $6000 to your 401(k), 403(b) or 457 plan. With a 403(b) plan, if you’ve been employed with the institution for at least 15 years, you may be eligible to contribute an additional $3000. For a SIMPLE 401(k)/IRA you can contribute an additional $3000. Conceivably, if you went from saving next to nothing in your retirement accounts to saving the maximum + catch-up contributions, that would be a hefty boost to your retirement nest egg. I’m definitely in the camp that it’s better late than never when it comes to saving and managing your finances. But lest you forgot, time and compound interest are very important factors in saving sufficiently for retirement and meeting retirement goals, and while he points out that if one did start playing major catch-up at 50 years of age, they would have a full 15 years to save and invest before turning the magical 65 years old. Still if you recall from the JP Morgan Asset Management Guide to Retirement graph that I love, on the importance of saving early, the later you invest, the MORE principal you have to put in to attain similar results as someone who started younger. In the graph you can see even 10 years makes a dramatic difference, where Bill (in green) has to invest 3x as much as Susan (in grey) and still ends up with LESS money than Susan at 65 years old. Now imagine if Bill didn’t start til he was 50 or 60 years old, that’s going to require Bill to either save a herculean amount or put him at risk for a lower standard of living in retirement than he would want to accept.
What I’m saying is don’t let 30 to 40-something parents off the hook completely. While it’s fair to be understanding that parents in the midst of the child-raising years won’t be necessarily able to save 20% of their income for retirement and emergencies, let’s not let that number drop all the way down to 0%. Additionally, 50’s and 60’s can be a time of major health issues and disabilities that might force people to cut back their working hours or even worse completely stop.
Furthermore, the assumption that 50 & 60-somethings will suddenly be able to redirect a large portion of their cash flow from their kids to their retirement, I think is a huge one. First, not every kid becomes totally financially independent from their parents once they go off to college. I rarely see many 18 year-olds who are able to pay for college tuition and fees, housing, food and all other expenses 100% on their own. In fact, just recently a Pew Research Study came out saying that for the first time in 130 years, people aged 18-34 are slightly more likely to live with their parents over a partner. Granted a lot of this is due to the bleak economic fate handed to millennials, but I still think it’s a pretty big assumption that once your kid goes off to college that you’ll suddenly free up all this money. Still, if you recall from my previous post The Price Tag on a Baby: $245,340, the USDA does claims that it costs an average of a little under $15,000/year to raise a child aged 15-17, so if you could free up even 50% of that cost, then a couple could have an extra $7500/year in cash available, to hopefully put towards their retirement (and not some long delayed vacation or other splurges). But the report also stated that 30% of the costs of raising a child is housing. So unless parents downgrade housing immediately after a child leaves for college or has been able to payoff their mortgage completely, this 30% is unlikely to be freed-up right away. Also, you might have sent one kid off to college, but don’t forget the other child(ren) left behind that still probably have another 2 to 3 years before they get sent off. So arguably, parents can’t save for retirement til their last child is out of the house, further delaying the time to play catch-up. I also find it highly unlikely that these same people who couldn’t even save for their own retirement because they were too busy buying a bigger home, clothing and feeding their kids or whatever it was that tied up all their money, would have saved anything substantial for college. I guess one could assume that the parents will not help their children pay for college or grad school whatsoever and that’s all on the kids once they turn 18 and they’ll just have to take out student loans. But how many parents do you know who are going to do that if they have extra cash to give towards their kids college expenses? Lastly, given the choice, would 50 and 60-something adults decide to divert their free cash to retirement? After pouring all their money into their kids for 18 years, they might want to go on vacations or splurge in some other way. If an underlying spending/budgeting/financial prioritizing problem is the reason they can’t save for retirement even during the burdensome child-rearing years, then it wouldn’t be too surprising if the problem doesn’t suddenly correct itself even with the kids gone and extra cash available. Though to be fair, I think this where Michael Kitces is saying a financial advisor could step in and help people redirect that vaccum of money created towards their retirement.
He concludes his post by proposing “perhaps it’s time to stop guilting parents in their 30s and 40s about not saving enough, and recognize the savings opportunity for empty nesters in their 50s and 60s. Because telling parents to save 10%-20% of their income during the child-rearing phase may be unrealistic, and telling empty nesters to save 10%-20% of their income may underestimate their ability to save and get their retirement on track!“ Overall, I think playing significant catch-up in your 50’s and 60’s is a very reasonable and realistic solution to offer adults who are now empty nesters with little to nothing saved for retirement, but I think it’s a dangerous concept to feed younger adults, because the fact that they can’t save any portion of their income for retirement tells me that more likely the issue here is a fundamental spending/budgeting/financial prioritizing problem and ultimately an inability to live within their means, because part of living within your means is saving for retirement! I know people love to talk about how they can’t live on an income of $50,000/year or $75,000/year or even $100,000/year, but the cold hard truth is they could if they had too, it’s just they don’t want to. Sure I believe in circumstances where people really can’t survive on the income they make even when they aren’t “overspending” or I do believe somewhat in the standard of living excuse often brought up because we’re privileged enough to live in the United States, but the reality is that it’s much more likely to be the other way around, that people spend up to and over what they make, no matter what their income level is or will be. It’s a psychological issue, not a money one. I hear of people making over $250,000/year (granted in California so I do feel their pain) who feel they can barely “survive.” However, when we start dissecting what’s causing the cash flow problem, it comes down to things like, well we need to have this luxury SUV because it has a higher safety rating. We need to send our kids to private school, because the public school around here isn’t very good. We need to all have smart phones or ipads or <insert whatever gadget or item that is a must have of the moment> because that’s what all the other families have. We need to live in this neighborhood because it has the best school district and we need to have at least a 4 bedroom house. I’m definitely not saying there’s anything wrong with using your money for these things or anything even wrong with keeping up your standard of living based on where you live. On a side note, I had a conversation with a coworker, about how if you choose to live in a certain neighborhood and send your kids to a certain school (by “certain” I mean affluent), then you can’t exactly send your child to school in Goodwill clothes or throw them birthday parties in your home with nothing but a cake and some plastic party favors, when their classmates are wearing designer threads and renting out hotel ballrooms for birthdays. It’s not fair to your kids to have them bear the brunt of being bullied or becoming an outcast at school. Kids are mean! But that’s a whole other conversation topic. Anywho, coming back around, realize your money choices for what they are, a want not a need. If you can’t save at least some portion of your income consistently for retirement and emergencies, with or without kids, then you should exam your lifestyle and consider making some major downgrades (or moving-don’t rule that out!)
What do you think? Ok to tell parents to stop worrying about saving for retirement while raising kids and just make it up in their empty nest years? Or force adults to take a hard, long look at their lifestyles and budgets and make some sacrifices painful as it might be? Share your thoughts below!