Kids are expensive. They are amazing, and expensive.
Expensive enough that all the [somewhat flawed] posts about how, if you start saving 15% of your income when you’re 25 you’ll have somewhere in the neighborhood of several millions of dollars when you retire–well, all that can kind of fly out the window if you’re 30- or 40-something and finding it hard to save because of summer camps, and clothes, and food for a middle-school boy, and sports teams, and college tuition. So then you read all those other posts about how there’s such a large retirement savings gap in the US, and then feel deflated and resigned to the fact that you’ll be sitting at work for at least fifty more years.
Well, of course. Kids, as I said, are expensive.
But a recent piece by planning guru Michael Kitces does a great job of reining in some of the doom and gloom. The long and short of it is, Empty Nesters actually have the potential to be in the most prime saving position of their lives, so much so that they can in many cases make up for the savings gap left by those expensive kids.
The premise is that when the kid or kids have flown the coop–and assuming that remains a more or less permanent situation–Empty Nesters find themselves providing for only themselves, with generally higher earnings than they have ever had. And that means they can take the money they were spending on raising children (or at least a large chunk of it) and instead save it aggressively. For example, an Empty Nester couple aged 50, earning $100,000, and looking to retire at 65 “can accumulate over $1,000,000 of retirement savings by ‘just’ saving 30% of their income and investing for growth (an 8% growth rate).” Of course that result assumes straight line growth (i.e., 8% every year) and we know returns never happen that neatly, but still, the couple has managed to make up a large deficit in their retirement saving simply by diverting the dollars that had been going to expensive kids to long term investments that will allow them to do the things they want to do when they retire.
What I’m not saying, and what Kitces is not saying, is, “stop trying to save when you’re young with kids.” It’s important to capture the mystical powers of compounding early, to whatever extent you’re able–even if it’s a smaller amount.
We’re also not suggesting that saving 15% even while you’re raising kids means when they leave you should spend that new-found margin (because the resulting significant lifestyle creep could render your savings inadequate).
What we are saying is this: if it’s causing you financial stress or proving impossible to save 10-15% when you’re raising kids, know that when the kids are out of the house you can buckle down, save much more than 10-15%, and probably be okay. If you’re curious about how this might look in your particular situation, please know we’re here to help.