Are You an Empty Nester? Do this!

I get it.  Raising kids is not only hard, it’s very expensive!  According to the U.S. Department of Agriculture, the average cost of raising a child for a middle-income family is $233,610…not including college!  This comes out to about $14,000 per year per child.  It’s no wonder that the average savings account balance across American households is a measly $17,000.  Until your kids are out on their own it’s very tough to save for retirement.

BEST STRATEGY: My single strongest recommendation during this phase of ‘raising your children’ is to max out the matching portion of your company’s 401-k plan.  Many companies will match fifty-percent of your contribution up to six-percent of pay.  Ideally, you should be saving (including the match) a minimum of 10% of your total earnings while avoiding consumer debt (credit cards, car loans, store charges, etc.) as much as possible.

Once the kids are on their own and you’re an ‘empty-nester’, it’s time to regroup and refocus on your retirement planning.  Here’s what to do now:

  1. Determine the size of the problem. For a good starting point, multiply your current annual salary by ten.  So, if you’re making $60,000, your number will be $600,000.  This is your minimum goal for retirement accumulation.  It’s a big number but you should have about twenty years where you can divert money that was spent on children to your retirement investment program.  For a more detailed analysis, use one of the many online retirement income calculators.
  2. Save! Save! Save! At a minimum, during this empty nester phase, you should be saving 15% of your gross income.  The good news is that you are entering your peak earning years and you have lots of free cash flow because your children are on their own.  As your income rises, so should the amount you are saving.

BEST STRATEGY:  Start with 15% savings based on total earnings and then take one-half of all raises and bonuses to increase your savings amount.  If you adopt this simple plan, you’ll be surprised at how much progress you will make in a few short years.

  1. Stop spending on adult children! Unless your financial circumstances are highly unusual, you’ll need all of the money you were spending on your children to save towards your retirement.

“Definition of Financial Insanity: Providing financial support for adult children when you lack adequate financial resources for yourself.”      – Stewart Welch, III

  1. Invest heavily in stocks, stock mutual funds or ETFs. Historically, over long periods of time, stocks out-perform bonds, CDs and money market funds by about double.  You’re going to need these higher returns to meet your retirement income goals.  Once you’re within five years of retiring, begin to add bonds or bond funds to your portfolio until you have 30% to 40% in bonds at retirement.
  2. Downsize your home. If you’re really committed to accelerating your retirement savings, consider downsizing your home.  For a detailed list of benefits, review last week’s column:

7 Reasons to Downsize Your Home Before Retirement

More than eighty percent of workers arrive at retirement significantly underfunded.  Realize that you’ll spend about one-third of your life retired.  You’re not going to want to spend those years under constant financial struggle.  By diverting money you were spending on raising children to your retirement savings plan, you can create the retirement of your dreams!  To develop the best plan for you unique circumstances, meet with a professional adviser such as a Certified Financial PlanningTM Professional.