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Bigger 401(k) Contributions Are Easier for Empty Nesters

Bigger 401(k) Contributions Are Easier for Empty Nesters

(Bloomberg Businessweek) -- Looked at your 401(k) statement lately? Your investment accounts are probably doing well overall, but the total still seems too small to maintain your lifestyle in retirement. You know you should have saved more in your 20s and 30s, but it wasn’t easy with a layoff, two kids, buying a home, and taking vacations. Now you’re fiftysomething, and the college bill for your youngest child looms. The family car needs to be replaced soon, too.

You wish you’d followed the classic advice in the 401(k) literature to regularly set aside at least 10 percent and maybe as much as 20 percent of income in retirement savings. The longer you wait, the higher the odds you’ll end up scrimping later in life. The save-early-and-steady mantra is sound advice. Yet the recommended percentages are often unrealistic. It’s little wonder the median combined 401(k)/individual retirement account balance for working households nearing retirement was only $135,000 in 2016, according to the Federal Reserve. That sum would provide about $600 a month in retirement as an annuity.

“People feel very pressured,” says Michael Kitces, director of research at Pinnacle Advisory Group, a wealth management firm. “They aren’t saving enough, and they look at their household expenses and wonder where the savings will come from.”

Despair shouldn’t be the default reaction. People approaching the traditional retirement years with a savings shortfall are far from doomed. Instead, they have an opportunity to shore up household finances by continuing to earn an income, especially if they’re empty nesters. “When we talk about people who are behind, the No. 1 solution is working longer,” says David Littell, a professor of retirement income at the American College of Financial Services. “It has a huge, positive impact.”

Empty nesters are well-positioned to save substantial sums, given how much it costs to raise children. Kids need food, clothing, education, and child care, as well as smartphones. Well-off married parents with a child born in 2015 can expect to spend $372,210 on child-rearing expenses from birth through age 17 (in 2015 dollars), calculates the U.S. Department of Agriculture. Not surprisingly, household cash flow improves once the kids are out of the house and self-sufficient? “The lift comes from disposable dollars,” Kitces says. “It’s a material amount of money.”

That’s the experience of Kate Barr, 63. As president and chief executive officer of Propel Nonprofits in Minneapolis, she advises nonprofits in the Upper Midwest on strategy, finances, and corporate governance. Barr has had a varied career, including as a dancer after college and a long stint as a senior executive at a community bank. She and her husband had two children, who attended liberal arts colleges. They made sure the kids graduated without student loan debt. “We don’t have their costs,” Barr says. “We’re also not revolving our time around them. I’m continuing to work and max out my retirement savings contributions.”

Scholars at the Center for Retirement Research at Boston College offer this hypothetical: a married couple raising two kids and making $100,000 combined, who contribute 6 percent of their salary annually to a 401(k) while the kids are still at home and in college. Once the kids aren’t a factor financially, the couple could put 18 percent of their earnings into the 401(k)—a 12 percentage point hike.

The opportunity to save for empty nesters has two big implications for retirement planning. First, the most important investments for experienced workers are in improving their job-related skills. “Our safest asset is our human capital, our ability to work,” says Carolyn McClanahan, an M.D. and certified financial planner at Life Planning Partners Inc. in Jacksonville, Fla. Littell, of the American College of Financial Services, expects planners to devote more time advising clients to maintain a healthy lifestyle, nurture their network of industry contacts, and develop deep professional ties. “One of the things we’re starting to put into the curriculum is if working longer is so powerful, how do you make sure clients have employable skills?” he says.

Empty nesters need to salt away much of their newfound cash flow. There’s nothing wrong with taking an extra vacation or spending more on a hobby. Even so, Kitces says they could probably hike their savings to 25 percent to 30 percent of income (including into retirement plans) once they’ve only themselves to support. But the evidence so far suggests households are raising their savings rates by just a fraction of that amount, less than 1 percentage point on average, according to a 2016 report from the Center for Retirement Research. Behavior may change as working longer becomes increasingly common. The civilian labor force participation rate of Americans age 60 to 64 rose to 57 percent in 2018, from 44 percent in 1987, according to a report from the Brookings Institution. Participation increased to 33 percent from 20 percent for those 65 to 69 years old.

Knowing there’s time to save for retirement later in a career is liberating. And easier than many expect. Barr examined her spending and saw that the biggest payments went to entertainment, charity, and travel—quite a change from the six to seven years she and her husband were paying college tuition. Says Barr:“You do have time to restore your finances.”

To contact the editor responsible for this story: Dimitra Kessenides at dkessenides1@bloomberg.net

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