When it comes to retirement planning, timing is everything. You have to do some things as early as possible--like starting to put money away for retirement--but you also have to consider when to take on big pre-retirement expenses.
Those can include starting a family (with all the daily and college tuition expenses that entails) or starting a business. Perhaps you want to do both. But that doesn't mean you should let your retirement planning slide.
"The key is to start saving early," says Ric Edelman, co-founder of advisory firm Edelman Financial. "The earlier you start, the more compound interest can work for you."
Indeed, if a 25-year-old saved just $250 per month, he or she could expect to have more than $1 million at retirement, assuming a 9 percent average rate of return. But a decade-long delay in starting that savings account would require that this individual save more than twice as much to have the same nest egg.
That's assuming you don't tap those savings. But surveys conducted by the small-business marketing firm Manta found that 66 percent of entrepreneurs use their personal savings to launch their companies, while some 34 percent of business owners have no retirement plan at all. Follow these steps to avoid making the same mistakes.
Postpone Parenthood if Possible
You might not immediately think of this as a retirement strategy, but nothing makes saving early quite as simple as having kids late. Just ask Ross Gerber, co-founder of Gerber Kawasaki Wealth and Investment Management. At 46, he is the proud parent of two preschoolers, ages 5 and 2.
"Often the easiest way to tell if somebody is rich or poor is to look at the age they were when they started a family," says Gerber. "The later you start, the better."
The Department of Agriculture estimates that the average middle-income family spends more than $1,100 a month raising a child. Each month you delay that expense puts you in a better position to save.
By the way, delaying parenthood is not just about saving. Professional women who wait until age 35 to have children earn an average of $50,000 more than those who have children at 20, according to Elizabeth Gregory, author of Ready: Why Women Are Embracing the New Later Motherhood.
Older moms also tend to have more work experience, often putting in more than a decade to establish their careers. That can give them the clout to structure postpartum jobs that wouldn't be available to 20-year-olds with limited work experience. That leads to less time out of the work force, higher incomes, and more savings.
And you'll need more savings if you do have kids--especially for their college expenses. But having children or committing to sending them to the best schools money can buy shouldn't derail your retirement planning.
Look at College as an Investment
The notion that college is an "investment" has been used to justify spending almost any amount on getting a degree. Instead, parents should evaluate an investment in college just as they would an investment in the stock market and consider how well it might pay off. Your children "are going to college as a financial investment in their future earnings," as Edelman puts it. "That means you have to apply financial criteria to the decision--not just about whether to go, but where to go and how you do it. If your kids want to enter a profession that is not financially rewarding, you have to make sure that you obtain that education at the lowest possible cost."
That may mean going to a state school rather than a private one, spending two years at a community college and living at home, or delaying college for a year or two to work.
Get a Bead on Where You Stand
Most people have no idea where they stand with retirement planning, because they've never done the math to determine whether they'll have enough. That's understandable to some degree, since retirement calculations are complex, requiring speculation about inflation, interest rates, and longevity, plus a bit of long-forgotten algebra.
Web-based retirement calculators can help. My favorite of these online tools is Kiplinger's Retirement Savings Calculator, because it is clear about the assumptions that are being made about your investment returns and how much you think you'll need to live on. Better yet, if it turns out that you don't have enough saved already, this calculator will tell you just how much you need to sock away each month from now until your projected retirement date to have the savings you'll need.
Consider Delaying Retirement
If the previous exercise leaves you depressed and certain that you'll never be able to save enough, realize that delaying retirement, even by a year or two, can have a dramatic impact on your retirement readiness. That's partly because Social Security pays an 8 percent bonus for each year you delay taking monthly benefits after your ordinary retirement age. But it's also because this delay gives you more time to save and your money more time to grow, and reduces the number of retirement years you're financing. (After all, delaying retirement doesn't mean you'll live longer. You'll simply have fewer no-wage years to finance.) As a simple rule of thumb, for each year you delay retirement, you add nearly three years to your retirement security.
Curb Your Enthusiasm
Once the kids are done with school and out of the house, parents are likely to have far more money to spend if they're still working, says Geoffrey T. Sanzenbacher, assistant research director at the Center for Retirement Research at Boston College. Normally, they do spend it, too, but instead of on the kids, parents now seem to be splurging on themselves--taking more expensive vacations, remodeling the house, or buying better cars, for instance.
If you're a little behind on retirement savings already, this boost in spending is likely to set you back even more. That's because people tend to get accustomed to a lifestyle and feel the need to maintain it in retirement. The richer the lifestyle, the tougher it is to finance.
"If you can take that time when the kids are gone to cut back on your household expenses even a little bit, it can help you in two ways," Sanzenbacher says. "It can allow you to save a little more and get you accustomed to spending less."