Maybe It’s Okay Not to Save for Retirement Right Now
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.
Hi Matt, I’m going to have to disagree with you on this one. I don’t disagree that there are a lot of financial burdens on new parents. But reading this post gave me flashbacks to interest-only mortgages. “Don’t worry, just make smaller payments now, and your payments will increase in five years when you’re at a better place to be able to afford it.”
The sad truth is that our society is typically unable to defer gratification. Many borrow for or lease brand new cars (or there wouldn’t be so many auto dealerships), buy more house than they can afford, buy new clothes, buy coffee out instead of making it at home, and eat out way beyond their means. And they truly wonder where their money goes.
In that mentality, there will never be breathing room in the budget “later” for retirement. There will always be new expenses. Diapers turn into ballet lessons, which turns into braces, which turns into college tuition which turns into eating out more and a bigger house because “we can afford it now.” We need to learn to make a few cuts now.
The person who will at least put $5/week into their 401(k) will still be light-years ahead of the person who never starts. Please don’t give anyone an excuse to not save for retirement. The person who doesn’t think they have $5 to spare is either not thinking creatively or not asking for help. There are resources: you’re one of them. Dave Ramsey is another.
I don’t want people to be paralyzed with guilt. But I think sometimes that guilt (or fear) can motivate us to admit that “what I’m doing is not working; maybe I should try something different.”
I appreciate your thoughts here Karl and I think you make a lot of good points. I completely agree with you that it’s easy to get trapped in the mindset of never feeling like you have room to save, and that to some extent saving is a skill that can only be improved with practice.
My goal here isn’t to encourage people to completely blow off the idea of saving. Instead, it’s to recognize the financial realities of starting a family and to let people know that there are ways to responsibly plan for retirement that don’t require you to be fully “on track” right away. I completely agree that in an ideal world you would be able to save the full amount right now, but in some cases that just isn’t realistic. So instead of feeling like a failure, it can be helpful to learn about an alternative approach and to start making plans with that approach in mind.
But again, you make some good points and I 100% agree that there’s a danger in indefinitely delaying saving. Even a small start now can make a big difference in terms of building the habit.
I appreciate this article Matt – it hits close to home! Although it is easy to make excuses for not saving, sometimes, life just doesn’t make it plausible. As a single income family with three kids and being a young military guy, we were pretty much living paycheck to paycheck. Fast forward to today, and we are now saving 20% of our income. But, we remember the days when we did not have that luxury…it was VERY hard to make a living on so little income. Everything happens for a reason, and those days make us appreciate what we have now!
Thanks for sharing Michael. And a great example of increasing savings over time!
I really like reading about different POVs on savings. We were fortunate enough to be DINKs for several years (w/ good incomes) to get a running start on retirement savings…even with the tech crash which did set us back quite a bit. But, I do remember even a decade ago paying $15K+/yr for childcare for 2 kids and how much we wanted the kids to ‘graduate’ from diapers because that would mean paying less at daycare.
Sometimes, savings needs to take a back seat for a few years. Unless the kids are going to private school, sports/lessons (even tutoring) won’t come close to those daycare expenses.
Thanks for sharing your experience Laura! It’s great that you guys were smart enough to get a head start on your savings before having kids. That makes a big difference, especially if you need to pause or scale back your savings during those childcare years.
This makes me nod my head and cringe at the same time. It really isn’t feasible for some to save when they have young kids and are trying to make ends meet. But at the same time, not starting to save for retirement until later in life will mean forgoing a significant amount of compound interest and possibly employer matching. So, I guess if I was advising someone on this, I would strongly encourage them to contribute up to their employer matching still at a minimum and not worry about making additional contributions until they can a little later.
I hear you and I feel the exact same way. Part of me shudders at the idea of even suggesting that it’s okay to delay saving, but the reality really is that it’s especially hard at this particular stage of life. Rather than ignore that, I think it’s smart to acknowledge it and make a plan around it if necessary.
Matt, this topic has been on my mind a lot as I move to being full time self employed. One thing that has been helpful for me is to think of investing as a multifaceted approach. Just as we aim to diversify our money in our 401(k), sometimes it makes sense to diversify the investment in ourselves (college, education, training, side hustles and self-employment) as well as investing in our family (one parent staying home with kids, homeschooling, etc).
For myself, I can guarantee that we won’t put much into retirement plans this year, but I hope that the business I am building will turn into an asset down the line. And being self employed will allow me to participate more in homeschooling our children, which I hope is a great investment for their future.
I love that outlook John! It’s actually something I think about a lot myself as I try to build my business as well. There’s always a balance between trying to do more and spend more time to earn more money on the one side, and wanting to invest in my kids and my wife and spend time with them on the other side. Sometimes I feel like I’m not being a good enough father/provider if I’m not working hard on the income side of things, but I try to remind myself that investing in my family is even more important and needs its own time and commitment.
Anyways, thanks for sharing this. It’s a really valuable perspective and I’m glad you brought it up.
Thank you Matt. Thank you for allowing all the different comments too. As a SINK (single income numerous kids), father of 3, ages 6 and under, I am living this challenge. But it is not impossible. Your other posts about tracking expenses opens the door to finding ways to cut out unnecessary spending and begin to save and invest. Have you heard of Acorns.com? Micro investing by rounding up purchases. https://acorns.com/invite/PMC8TX. I know investing is a bit different than a retirement savings, but nonetheless, thank you for keeping the discussion going!
Thanks for chiming in Corey! I’ve heard good things about Acorn and will have to look into them further. But I really like your point that you can at least get started in small ways, even if it’s not the full amount. Simply getting in the habit is a big step, and building up some savings along the way is great!