In their latest research on the National Retirement Risk Index, the Center for Retirement Research at Boston College looks at the impact of children on parents’ retirement readiness. The research findings reinforce the critical inflection point that emerges when children leave home. It’s at this point of their financial lives that parents are likely able to reduce expenses and take action to help improve the odds of a more secure retirement.
3 reasons why empty nesters should consider refocusing on retirement savings
Over half of Americans are at risk
52% of all households are at risk of not having enough saved to maintain their standard of living in retirement, and it goes up 2% for every child.
They are wasting an opportunity
For every child in the household, your expenses increase by 20%. But once children leave, empty nesters are not increasing their retirement contributions enough and appear to be spending most of their new-found money.
Smarter choices could put them back on track
A couple earning $100,000 in their early 50s still has 15 years left for retirement accumulation and can save over $500,000 by allocating 25% of their income and investing for growth. (Assumes 5% growth)
Financial areas of focus for empty nesters
In light of these findings, here are some key steps parents should consider that may help to improve retirement readiness when children leave home:
Increase contributions to retirement accounts. Currently, workers age 50 or older can contribute $24,000 to their 401(k) accounts. This excludes any additional amount an employer will match. Those who have maxed out their pre-tax 401(k) savings in prior years may wish to shift some of their contributions to a Roth 401(k), if it is available. By paying taxes now, parents can enjoy tax-free Roth income in retirement. Roth income has the added benefit of being excluded from the Combined Income formula, which determines whether Social Security will be taxed. Those age 50 or older who are eligible can also contribute $6,500 annually to an IRA or Roth IRA.
Convert IRA and 401(k) dollars into Roth dollars. Again, using available income (outside a 401(k) plan or IRA) to pay taxes now on retirement assets allows Roth assets to grow and then be withdrawn tax-free during retirement. Many 401(k) plans allow for in-plan conversions from pre-tax 401(k) dollars to Roth 401(k) dollars.
Start planning to maximize Social Security benefits. The decision on how and when to claim Social Security benefits is critical for most retirees. Pre-retirees should investigate how different Social Security payout strategies can be integrated with other retirement savings to provide income for as long it may be needed.
Engage a financial advisor. The retirement stage of a family’s financial life is much more complicated than the accumulation stage and the risks are much greater as well. Proper planning in the years leading up to retirement can help minimize taxes, mitigate risks, and ensure income is generated for as long as it is needed.
To learn what other actions empty nesters can take to prepare for retirement, read Planning for Retirement: Financial Areas of Focus for Empty Nesters.
The National Retirement Risk Index (NRRI), published by the Center for Retirement Research (CRR) at Boston College, measures the percentage of working-age households at risk of being unable to maintain their pre-retirement standard of living during retirement.
Prudential is the exclusive sponsor of the National Retirement Risk Index.
0310454-00001-00 Ed. 10/2017