Fellow boomers: Have you had dark moments when you wished you had started saving for retirement earlier? (I certainly have.) You saw those charts illustrating the power of compound interest over time, but life intervened. Spells of unemployment. Family vacations. Home remodeling projects. Sending the kids to college. Pets. You told yourself: “I’ll get serious about saving for retirement in the future.”
If this sounds like you, there is reason for optimism. Without leaping into Pollyanna territory, I believe that many people in the second half of life have enough time and ample opportunity to shore up their household finances (with three critical caveats I’ll get to shortly).
The 2 Reasons for Optimism
Here’s why: Parents can take advantage of the empty nest to save more, and many people (parents and otherwise) will be able to earn an income well into the traditional retirement years, while spending less than in the past.
The key to this more hopeful financial perspective is the idea that “retirement” no longer means full-time leisure — not working.
Once a child becomes financially independent, 'parents often have a substantial amount of extra money on hand.'
— Center for Retirement Research at Boston College
Let me first talk about the parent side of the equation.
Michael Kitces, director of research at Pinnacle Advisory Group, a wealth management firm in Columbia, Md., put it well, writing: “Saving a percentage of income as a young adult becomes unrealistic in your 30s and 40s as kids crowd out the ability to save much at all, and then understates the savings need (and opportunity) in your 50s and 60s once the kids are out of the house!”
Let’s face it, kids are expensive to raise. According to the U.S. Department of Agriculture, middle-income, married parents of a child born in 2015 should anticipate spending an inflation-adjusted $284,570 for food, shelter and other necessities on him or her through age 17. That estimate doesn’t include the cost of college.
Empty Nesters, Fuller Wallets
But once a child becomes financially independent, “parents often have a substantial amount of extra money on hand,” wrote scholars at the Center for Retirement Research at Boston College in Do Households Save More When Kids Leave Home?
And that offers up a serious savings opportunity. The Boston College researches offer this example: A hypothetical household raising two kids and making $100,000 annually contribute 6 percent of salary to a 401(k). When the kids leave the home to launch their careers, the couple could set aside 18 percent of earnings into the 401(k) — a 12 percentage-point increase.
“The key is you need to grab what has been going to the kids and put it toward you,” says Ross Levin, a Certified Financial Planner and co-founder of Accredited Investors Wealth Management in Edina, Minn. Adds Christine Benz, director of personal finance at Morningstar in Chicago: “Redirect the money flow to turbocharge your savings for retirement.”
How households save after the kids are gone turns out to be the key difference between pessimistic studies on household preparation for retirement and optimistic scenarios.
The optimists expect households will save more, an approach that informs the final report from the Merrill Lynch/Age Wave series of studies on aging.
In sharp contrast, the Center for Retirement Research at Boston College scholars note that the increase of money into 401(k)s by the typical empty nester is only 0.7 percent rather than their theoretically possible calculation of 18 percent. They suspect some parents treat themselves more once they have some extra money and some are still supporting their grown kids. The assumption that empty nesters won’t change their spending habits is a major reason why the Center’s National Retirement Risk Index finds 52 percent of households at risk of coming up short in retirement.
Working in Retirement
Now, let me turn to the working side of the equation.
Although age discrimination remains a serious barrier for older Americans, retirement increasingly signals a transition from a career into either: phased retirement with the same employer; returning to part-time work with that employer; shifting to bridge jobs (including self-employment and gig economy work) or some other part-time, flexible employment.
Adding even a few additional years of work in retirement can allow many families to make up for much, if not all, of their projected retirement-savings shortfall.
You may know that a typical worker who starts saving for retirement at 25 rather than 45 cuts her required savings rate for a decent retirement by about two-thirds. But what you may not know is that if she delays her retirement from 62 to 70, she also cuts her required savings rate by two-thirds.
Better yet, earning an income in your 60s may enable you to delay filing for Social Security, which will boost the size of the benefits once they start rolling in. The Social Security retirement benefit is more than 75 percent higher at age 70 than at 62 — and stays higher for the rest of your life.
Here’s another way to think about the power of working longer during the empty-nest years: Let’s say you earn $30,000 annually in your unretirement. That’s the equivalent of withdrawing 4 percent a year from a $750,000 retirement savings plan (4 percent is a well-known personal finance rule of thumb for safe withdrawals in retirement). Earning $20,000 equals a 4 percent withdrawal from a half-million-dollar portfolio and $40,000 annually would equate to taking out 4 percent from $1 million in savings.
Ways to Trim Spending
Reducing spending, for empty nesters and for others, is another way to free up cash for savings.
For parents whose kids have flown the coop, that means not tapping into increased cash flow to splurge on travel or home remodeling. By all means, loosen the spending reins a bit, but be sure to make savings a priority.
Top of the expense-reduction list for anyone in retirement: getting rid of debt. Another possibility: downsizing into a smaller house or into a rental apartment. Larger homes cost significantly more to maintain and insure (and typically come with a high property tax levy). “Downsizing is often underestimated as a lever in retirement,” says Benz.
My 3 Caveats
Now to my three caveats.
First, not everyone who wants to work in retirement can. Some people have deteriorating health. Some have caregiving responsibilities. Some can’t find work. Some have a combination of these.
Second, the U.S. needs a universal retirement savings plan system that would cover the nearly half of private sector workers who now lack access to an employer-sponsored retirement plan.
Third, these financial maneuvers aren’t available to people who’ve always labored for minimum wages. Social Security is their pension. The most important action policymakers could take for them is improve the Social Security benefit payout.
Personally, I don’t think the savings opportunity in the second half of life has been highlighted enough. Time is still on your side (to my relief!) Now, seize the opportunity.
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