Sprint to retirement, Part 2

By Gary Silverman, CFP®

Last week we looked at a common situation: Instead of starting a retirement savings program when you first left school and began working, things got in the way. It might have been a number of factors. But last week we mentioned the most common: kids. They are expensive. For many folks, paying for them and saving for retirement can seem a daunting task.

Eventually though, kids do grow up and leave the house allowing you to start catching up. With limited time left prior to retirement, saving 30% of your income can get you a very nice sized nest egg. And with the kids gone a lot of money is freed up. The problem is that even with the kids finally gone, 30% can be a bit of a stretch (to say the least) for most.

But there is another more prevalent reason that this pivot point in your finances doesn’t get into your retirement pool: you don’t want to put it there. After all, you’ve been denying yourself all these years instead of getting that nicer car you’ve been wanting, or remodeling the house to suit your new empty nest lifestyle, or purchasing that dream cabin on the lake. Imagine how 20, 25, or 30% of your income could raise your standard of living. Don’t you deserve it?

Another issue may be bad luck. If you do textbook retirement savings from your 20s through your 60s, you have 40 years of market ups and downs to go through. This is a good thing because sometimes you hit 10 and 15-year flat market periods. 40 years gives you time to get through them and still see substantial growth prior to retirement.

But if you don’t start saving until the kids are out of college then you might only have 15 years to get it all done. What if those 15 years are like the last 15 years we’ve seen: Anemic growth in the equity side of your portfolio? You don’t have time to wait for the next bull market to materialize so what do you do? Just start saving. You’ll still be a lot better off. That said, it does show the potential ramifications of an abbreviated savings period.

This is exaggerated as people start having their families later in life. Children coming later shrinks the length of time you have for that extra cash to catch up with your investments. This both lessens the amount you can save and even further exaggerates shorter-term markets issues derailing your investments.

As we can see there are several ways to save for retirement, but in the end the calculations are pretty simple. You need to put money in, give it time to grow, and get a rate of return that’s greater than the erosion caused by taxes and inflation. Your kids follow a growth pattern, your retirement savings should, too. 

This article was published in the Times Record News on August 14, 2016.