How Empty-Nesters Can Improve Their Nest Egg
This post was written by Audrey Keohane, a Summer Intern here at Woodside Wealth.
If you’ve neglected your retirement savings while raising your child(ren) you are not alone. Many parents push off or drastically reduce retirement savings in order to save for their child’s future or cover the extra expenses a child always brings. This doesn’t necessarily have to put a dent in your retirement plan, as long as you follow the proper steps to create a catch-up savings plan. The most crucial point in your retirement savings may very well be the day your last child leaves the house and begins to cover their own expenses. You are now faced with a great increase in disposable income and, if you follow through with a plan for the extra savings, you could turn that extra cash flow into a retirement you’ve always dreamed of.
To make this happen, you should first create a plan months before your child leaves your home. The first step in this plan is to estimate what you’ll need per year in retirement. A good rule of thumb is that you will end up needing about 80% of your final income due to a reduction in taxes and other expenses. Once you determine this number, the next step is to estimate Social Security and pension benefits you will receive every year and subtract them from the amount you’ll need per year. This result is what you’ll need to pull from your retirement savings account. The Social Security Administration maintains a website which allows you to estimate the social security benefits you will be entitled to. To view this website, click here.
Next, you will need to calculate how much you will need total in your account to be able to withdraw your annual expenses for the length of your retirement. Many professionals believe you can withdraw up to 4% per year and therefore you must multiply the amount you will need annually by 25 to get the total you should have in your account. So, for example, if you need to withdraw $50,000 to cover your annual expenses, you should have a total of $1,250,000 in your account ($50,000 is 4% of $1.25 million). Depending on how much time you have until retirement, your estimated rate of return and your current savings amount, you can calculate how much you should save per year until retirement. To do this calculation, you can use an online time value of money calculator, such as this one. In order to use this calculator, using the example above, you would put $1.25 million in the Future Value (FV) box, the number of years you have left before retirement in the Periods box, the rate of return you expect to receive yearly in the Rate box, and the amount you have in your accounts currently in the Present Value (PV) box. Then you should click the Payment (PMT) button below the calculator to get an estimate of how much you should save yearly. If you find this to be a challenge to estimate on your own, seek out a financial advisor to help you along.
The bad news is: getting a late start on your retirement savings means you will not receive the benefit of interest compounding over decades of investing. Because of this, you will likely need to divert a larger portion of your earnings in order to increase your retirement account balance over just a couple of years. However, don’t be alarmed if your calculations tell you that you need $25,000 or more per year to achieve your goal. The U.S. Department of Agriculture estimates families with income between about $60,000-$108,000 spend around $26,000 per year on average to raise two children under the age of 18. Rather than raising your annual expenditures, which may sound appealing, you should consider putting a chunk of those savings toward your retirement. This is an easy way to instantly increase your savings and make your catch-up plan a reality. If you would like more help determining your retirement savings and spending plan, consider reaching out to us for a complementary initial consultation.