Save, Don’t Splurge, Once College Bills Stop Arriving
The kids are finally done with college and there are no more horrifying tuition bills ruining your mail.
So what do you do? Splurge on gifts, fix up the house, take a vacation, pay bills, or stuff a little more cash into the retirement saving account you’ve been neglecting.
If you are like many parents, you’ve been promising yourself for years that you will start saving for retirement in earnest once the children-related expenses end. After all, children are expensive — costing roughly $245,300 to raise a child to age 18, according to a 2014 estimate by the U.S. Department of Agriculture. Then you tack on $20,000 to $50,000 a year for college.
It’s no wonder retirement savings get shunted aside.
But instead of keeping promises to themselves, parents continue to let 401(k)s retirement savings plans lie fallow after the college bills stop, a new study by the Center for Retirement Research at Boston College shows.
As a result, many parents will end up feeling the same panic near retirement as they felt when the tuition bills started arriving.
“Most households will not be able to maintain their pre-retirement standard of living,” said the center’s research economist Geoffrey Sanzenbacher. “People will be unhappy and uncomfortable.”
In a previous study, the center found that 52 percent of Americans between age 30 and 59 had saved so little they will struggle in retirement. “They won’t be in poverty because they will have Social Security,” said Sanzenbacher. But Social Security covers basics, at best. The average Social Security check for retirees is $1,338 a month, according to the Social Security Administration.
“This is concerning,” said Sanzenbacher. “There is a retirement crisis. The economy will suffer because people won’t be able to keep up their spending.”
Some economists, however, have argued there won’t be a retirement crisis because parents would increase their savings to about 20 percent of earnings after raising their children.
But Sanzenbacher said his research disproves a common expectation among economists: That it doesn’t matter if parents didn’t save enough while raising children, because parents will pick up the pace of saving and make up for lost time when children are grown.
Instead, the study of federal data shows that parents continue to spend almost as much after the kids fly from the nest as while parents are still caring for families and paying for college. While the research doesn’t analyze specifically what parents buy after paying for college, Sanzenbacher said it appears that “after the kids are gone, people have a desire to splurge. Rather than going to Applebee’s or Olive Garden, they go to better places and take vacations. They spend on themselves.”
Not only do parents fail to increase savings in their 401(k)s, but they also devote little extra money to paying off their mortgages. While extra savings in 401(k)s are only a fraction of what economists assume is necessary to make up for lost time, extra mortgage payments do pick up somewhat — but only modestly.
After children leave home, contributions to 401(k)s increase 0.3 to 1 percentage point, researchers found. Households are just adding 2 percent of their earnings per year to paying down mortgage debt.
The researchers analyzed federal data, focusing on households where individuals had a 401(k). Such households tend to be among the best savers since they have retirement plans easily accessible at work. Yet, even they are falling far behind in saving.
To be able to maintain a lifestyle in retirement, financial planners suggest people have enough savings to provide annual income that is at least 70 percent of annual earnings prior to retirement. While more than half of people won’t get there, devoting more money to savings after paying for college can still make a difference.
A 50-year-old who has $100,000 saved for retirement could grow those savings to about $900,000 by retirement if he devoted $20,000 a year to a 401(k) and earned 7 percent on investments. That would give a retiree $36,000 a year for retirement expenses in addition to Social Security, using a rule of thumb: Spend 4 percent of savings. Test your savings at http://www.choosetosave.org/ballpark/.