Good News for New Empty-Nesters!

            As someone who is in the middle of raising children and experiencing the significant financial drain that parenthood entails, I was relieved to learn recently that there is still good news for me and my retirement portfolio.  Yes, I have heard the general advice – “save at least 10% of your income every year in order to retire comfortably” – but the reality is that dance classes, pointe shoes, bassoon reeds, and college tuition can detract one from being able to save at that rate.  Fortunately, as long as parents are able to take full advantage of the “catch-up” years, there is hope for a successful retirement.

            It is estimated that if someone who is 25 making $50,000 per year, adjusted each year for inflation, saves 10% of their income every year in an investment portfolio earning an average of 8% per year, that person will have accumulated $2 Million by the time they reach 65.[1]  However, if that same person makes the decision to raise a family, there could be a period of 18 years or more during which saving 10% of income is unrealistic.  In fact, it is estimated that it costs an average of almost $250,000 to raise one child to age 18.[2]  It is not surprising then that saving for retirement almost always takes a back seat during these years.  Lack of savings during the child-rearing phase will likely lead to a gap in a person’s ability to maintain their lifestyle in their retirement years.

The key to successfully saving for retirement, even if you choose to raise a family, is not allowing consumption levels to remain the same after the kids leave the nest.  Rather than spend all of your new-found discretionary income, it is better to redirect the money that was spent on child rearing to saving for retirement.  It is estimated that a couple might be able to save 25% or more of their income during this catch-up phase.  For example, a couple earning $100,000 per year during the empty nest phase can accumulate over $1 Million by saving 30% of their income for 15 years.

So, if you’re like me and you’re feeling badly about your inability to save as much as you would like because of the groceries, the sporting equipment, and all of the things, have no fear.  As long as you commit to redirecting those dollars into your retirement plan and other savings vehicles as soon as that last child leaves the nest, you will be ok.    

[1] https://www.kitces.com/blog/empty-nest-red-zone-catch-up-saving-for-retirement/

[2] https://www.usda.gov/media/press-releases/2014/08/18/parents-projected-spend-245340-raise-child-born-2013-according-usda