Your Loved Ones Are a Threat To Your RetirementJohnathan Douglas
Empty nest syndrome can be difficult. You’ve spent much of your adult life caring for your children, and then one day they go off to college, or to get a job, and suddenly, just as they’re now on their own, so are you. It can take some adjustment. However, there’s one perk: Now that you’re no longer supporting them, you have extra income that you can put away towards your retirement. Unfortunately, it doesn’t always work out that way in practice.
It’s estimated that parents’ disposable income should go up by about 12% once their children leave home. However, the amount they’re putting into their IRAs/401(k)s only increases by an average of 0.7% at the most. There are several reasons why this may be.
First of all, many parents, rather than save their extra money, take the opportunity to move up to a better lifestyle. They go out to eat more often, take more vacations, pay to fix up their home, and more. The impulse to do these things when you can afford it is understandable. However, it’s also dangerous.
For one thing, making these purchases without careful planning and budgeting means you’re putting less away for retirement. It also means that you’re getting yourself used to a higher standard of living. When you do leave work and are on a fixed income, you’ll have to tighten your belt far more in order to live within your means. It will be much more difficult, and you’re more likely to deplete your savings early.
Carrying the Extra Weight
Many people, once their children leave home, don’t treat themselves to more vacations or spend money fixing up the house. However, they still find themselves without much extra to contribute to their IRA or 401(k). That’s because even though their kids are gone, they’re still supporting them financially.
Around 61% of adults help out their children financially in some way. The most common way of doing this is to pay for a part or all of their college tuition. Just as students take out loans to pay for their education, many adults put themselves heavily in debt as well, to cover their children’s classes, books, etc.
Even if they’re not paying for their children’s college directly, it’s still a factor in why their income is still lower than it should be. When students graduate, they often have tons of debt, which they now need to begin paying off. Unfortunately, as tuition costs increase and wages don’t, it’s becoming ever more difficult to do this and still support oneself, particularly on an entry level salary. Therefore, the parents step in and cover rent or food or other expenses, to keep their children on their feet—at the expense of their own retirement savings.
What should you do about this? Should you cut your children off entirely once they leave the nest and refuse to support them when they need it? Not necessarily. However, it’s important to be aware of your own financial needs as well, and make sure you’re taking care of those before tending to your children.
If you are going to give money to your children, budget it carefully and set boundaries. Don’t put yourself in debt on their behalf, as you’ll likely be paying it off for the next decade or more. You can help them out financially, but don’t simply continue supporting them the way you always have, or you’ll both get used to it and let it continue far longer than it should.
Let your children know exactly what you will and won’t pay for, and help them get into a position of financial independence as quickly as possible. Teach them to live within their means, and be sure to do the same yourself. If you do this, you can build up your retirement savings more effectively, and eventually, perhaps even have enough money to take those vacations and fix up the house, like you’ve always wanted.