Determined to help their children pay for their education, many parents are covering hundreds of thousands of dollars in costs over four years or more while foregoing their own retirement savings and vowing to catch up later. This is a promise that many do not keep.
Despite government efforts to encourage catch-up retirement savings, many parents who prioritize paying for their children’s education over retirement savings are not taking advantage of it. It’s a broken promise that threatens the long-term financial sustainability of millions of retirees, but there are steps parents can take to shore up their situation or even erase the shortfall.
Using the federally-supported University of Michigan Health and Retirement Study and the Earnings Dynamics Panel Study, researchers at Boston College’s Center for Retirement Research found no evidence that empty nests have filled 401(k)s or individual retirement accounts to make up for lost time once the kids have left home. In addition, parents do not pay off their mortgages and other debts any faster than when raising children.
The analysis drew on income, pensions and behaviors collected from more than 20,000 people over the age of 50 in the Health and Retirement Study, as well as similar data from older households. young people in the study of income dynamics. Using the two surveys, the researchers were able to compare parents’ financial behavior while raising their children and afterwards.
Although the researchers did not examine why parents did not save more as empty parents, surveys showed that many reduced their working hours once their children were out of the house and took more time off. . That’s the opposite of what’s often needed financially when parents have skimped on savings while raising children, said Anqi Chen, an economist at the Center for Retirement Research involved in the study.
Fidelity has recommended that by the time a person turns 50, they have six times their salary set aside for retirement. Yet most people are far behind that.
The median retirement savings of 45- to 54-year-olds with 401(k) and individual retirement accounts was $105,800 in 2019, according to federal data Chen analyzed. The averages look healthier, but still suggest that many people who don’t save aggressively after raising children won’t be able to maintain the lifestyle they expect in retirement. The average retirement savings for the same age cohort was $254,000 in 2019, according to Federal Reserve data.
Federal rules for 401(k)s and IRAs make it possible to save catch-up later in a person’s working life. Currently, someone age 50 or older can store up to $27,000 a year in a 401(k) and $7,000 in an IRA or Roth IRA. For people under 50, the rules save up to $20,500 in 401(k) and $6,000 in an IRA or Roth IRA. But only 12% of people with 401(k)s reach the allowable limits based on age, according to Vanguard.
Still, people who save enough for retirement before their children’s college years can catch up if they are diligent about fulfilling their promise to save aggressively after paying for college, says financial planner Jim Shagawat of Paramus, NJ.
Shagawat talks about a couple he worked with who had $1.5 million in retirement savings when their two children started college, but insisted on not saving new savings while paying the fees education for eight years.
Shagawat showed the couple’s calculations showing how neglecting their 401(k) for eight years would jeopardize their future, even if they returned to saving moderately after college bills stopped. They were in good health and there was a good chance that they would exhaust all their savings in their 80s if they continued the lifestyle they were accustomed to, he said.
So after their youngest child graduated, the couple embarked on a solid savings routine that added about $300,000 to their retirement accounts over the next 10 years. As a result, they’ve been left with over $2 million for their retirement, he says, and it looks like they’ll live comfortably into their 90s.
The alternative for people who cut back on work after raising children is to also cut back on their expenses, said Andrew Biggs, who was a researcher on the study with Chen. He was encouraged during his research by data that shows that empty nests could do just that: reduce both income and consumption.
With a more modest lifestyle throughout retirement, less retirement savings may suffice. But people need to be realistic about whether their lifestyle cuts are enough, says Biggs.
Some research suggests that many people are unrealistic and may be surprised when they realize they have saved too little and spent too much. In a 2022 survey by Fidelity, 20% of Gen Xers — or those aged 42 to 57 — believed that when they retire, it would be okay to use 10% to 15% of their savings each year. This is a far cry from the commonly promoted 4% drawdown rule, which itself may be adjusted downward given runaway inflation and uneven market conditions.
Ultimately, if parents don’t keep their promises to catch up on retirement savings after college payments are made, they could be in trouble.
Financial planner Matt Stephens in Wilmington, North Carolina tells the story of a 60-year-old woman who asked for his help because she only had $40,000 saved for retirement and had just lost her salary. of $200,000 when the company where she worked fired her. She had just finished spending more than half a million dollars on private colleges for her three sons and had planned to start saving when her layoff blew up her plan to save her nest egg.
“There was not much I could do for her at that time,” he says, “other than hoping she would find another job and save like crazy.”
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