People like me tend to recommend saving as much as you can for retirement starting as soon as you can.
The intention is good. After all, math. The simple truth is that saving money early on is the most effective way to ensure that you’ll have more of it later on.
So if you can do it, it’s a good idea. But the problem is that it’s just not always realistic when you have young kids.
I’ve talked to so many parents at this point who are genuinely struggling to handle all of the financial obligations that come with starting a family. And the truth is that my wife and I are in the same boat. Between our variable income and all of the day-to-day expenses, we’re struggling to get to a point where we can save as much as we’d like on a consistent basis.
So the question is, should we just try harder and get more creative to find ways to save for retirement? Or is there possibly another way to look at it? A way that acknowledges the importance of saving, but also acknowledges the financial realities of raising children?
That’s what I’d like to dive into today.
Why it’s hard to save when you have young children
New parents face a double-edged sword when it comes to money.
On the one side, kids come with a lot of new expenses. Childcare. Insurance. Diapers. Wipes. Clothes. Food. It’s genuinely a lot to take on. And with childcare especially it can be incredibly front-loaded, with the biggest expenses coming in those first few years before your children are eligible for public school.
And on the other side, you’re often not yet earning as much as you eventually will. According to this breakdown of US Census data by my friend PK, personal income generally increases until you hit your peak earning years in your 40s and 50s.
In other words, new parents are earning less money than they eventually will AND are dealing with more expenses than they’ve ever had before.
No wonder it’s so hard to save!
Taking a different approach
Michael Kitces, who’s kind of a big deal in the world of financial planning, recently wrote about an alternative way to think about saving for retirement.
He acknowledges what we just talked about above, that starting a family represents a uniquely challenging financial period during which it can be hard to save money.
In addition, he points out that many parents become empty-nesters in their 50s and into their 60s, a period that combines a decrease in expenses with peak, or near-peak, income.
And when you put all of that together, Kitces suggests that the traditional idea of saving a consistent amount of money throughout your lifetime might be flawed.
Instead, he argues that it might be completely okay to save a smaller percentage of your income when you’re starting your family, as long as you use that empty nest period to ramp up your retirement savings and make up for lost time.
In other words, it might be okay to only save 0-5% of your income when your kids are young, as long as you can commit to saving 25-30% of your income once they leave the house. (Actual savings rates will obviously depend on your specific situation.)
Potential problems with this approach
I have to say, this alternative perspective really got me thinking when I first heard it. It not only makes a lot of sense in terms of dealing with the realities of different life stages, but it has the potential to remove a lot of the guilt that new parents feel when they’re struggling to save (I know I feel it!).
Of course, like anything else, it’s not a perfect plan. Here are some of the potential downsides that I can see.
1. People are starting families later
This is something Kitces points out in his original article. If people are waiting longer to start their families, that means that their kids won’t be out of the house until later in life, potentially shrinking that empty nest period and leaving them with less time to catch up.
This is a real risk, but there are a couple of ways that it could potentially be balanced out:
- If you can make significant retirement contributions before you have kids, that can help make up for a period of decreased savings while raising your family.
- Given all the advances in medicine, you may be able to work longer to extend those empty nest years.
2. Income is not guaranteed later in life
This alternative approach assumes that you will have steady income well into your 60s, and that simply might not be the case.
Your health may prevent you from working or from earning as much, and of course your employer may choose not to keep you on board. There’s just no guarantee that you’ll be able to earn enough money later in life to catch up on your retirement savings.
3. May need to care for parents and/or children
Right now, many baby boomers are being asked to financially support their aging parents. Others are supporting children post-college as they struggle to find work that fully supports an independent lifestyle.
In other words, that empty nest period where expenses are low may not actually materialize, or at least may not result in quite as big a reduction in expenses as you assumed.
What does all of this mean for YOUR retirement savings?
So, how should all of this information factor into your personal retirement savings plan?
First, let’s acknowledge that this isn’t an argument AGAINST saving for retirement. If you have room in your budget to save, you should do it, simply because saving money now is the best way to give yourself options both now and in the future.
But if you’re struggling to find room for retirement savings while raising young children, there are two implications worth keeping in mind:
- You’re not a failure. Raising kids is expensive and it coincides with a period where you likely haven’t yet hit your peak earning potential. Struggling to find room for retirement savings may just be the life stage you’re in, not a sign that you’re failing.
- Make a plan to save more later. While it may be totally normal and okay to not have much room for retirement savings now, that doesn’t mean that you should completely ignore it. Do your best to map out how and when you’ll increase your savings over time, even if that means looking 10+ years into the future. Your plan won’t be perfect, but it will help you to be prepared. You can use this calculator and play with the Current Age variable to see what your required savings might look like starting at different points in your life.
The bottom line is that all those people telling you to save early and often (myself included!) may be missing the basic fact that it’s just not possible for a lot of people with young kids.
So give yourself some room to live within the realities of your world, and don’t beat yourself up if you’re struggling to get “on track”. You may actually be just fine if you’re willing to look at things a little differently and plan ahead.