A “Catch-Up” Savings Strategy: Reasonable Approach or Excuse to Procrastinate?

A recent Wall Street Journal article outlined how parents, who may have fallen behind in saving for retirement while financially supporting their kids, can catch up and build an adequate retirement nest egg after their kids are launched.  This “catch-up” strategy involves taking the amount previously spent on child expenses and/or college tuition and dedicating it to retirement savings for the 10 or 15 years between kids’ college graduation and retirement.  That way, even if you have not been able to consistently save 10% to 15% per year toward retirement since the start of your career, you can still amass a nest egg sufficient to support your standard of living throughout retirement.

Giving Savers a Long-Term Perspective.  In theory, this is a feasible and reasonable strategy—and is applicable to other financial goals besides retirement as well.  As any parent knows, from the earliest days of bulk diaper purchases, kids are not free.  The U.S. Department of Agriculture estimates that upper middle-income households (with annual income between $59k and $107k) spend around $26,000 per year on average to raise two children under age 18, and this amount increases significantly for families with higher incomes.  Parents also know, however, that child expenses tend to wax and wane over the years.  For example, childcare expenses may be very high early on, and then drop abruptly as kids enter kindergarten, while other expenses—for activities, camps, orthodontia, private school, tutoring—may increase throughout childhood and teen years. 

Therefore, for natural savers, who desire to save steadily for retirement but find it hard to achieve during certain phases of child rearing, the catch-up strategy may be exactly what they need.  It reassures them that they will still be able to meet their goal if they are disciplined in redirecting funds from child expenses to retirement savings in the empty nest years.  And this principle can apply to goals such as college savings as well.  Perhaps you can’t afford to save to a 529 account while also paying for daycare or right after you’ve bought a new house, but you can make up for lost time once your child enters kindergarten or once you’ve adjusted to your new mortgage payment.  Life is messy, full of surprises, and not always conducive to saving steadily and consistently, but you can still reach your goal if you buckle down and save aggressively during the phases of life that permit it.

Giving Spenders a Reason to Procrastinate.  While a “catch-up” savings strategy makes sense in theory, there are a number of pitfalls that those wanting to retire comfortably may want to avoid.

• Check the math. The “catch-up” strategy for retirement savings depends on having a significant number of working years after your kids are launched.  The Wall Street Journal example assumes 15 years.  However, if you gave birth to your last child at age 40, you might only have 5 years until full retirement age when your child graduates college.  Further, this strategy depends on families spending a significant amount out of cash flow on their children.  However, child expenses can vary widely based on kids’ activities, whether they attend public or private schools, whether and to what extent parents pay for college expenses, etc.  If you only have a few working years left after kids’ graduation or you are spend less than average on child expenses, it may be difficult to implement the “catch-up” strategy for retirement savings.
• Beware of interruptions in income. Even if you plan on having 10 to 15 working years after kids are launched, you may face a job loss or health event that inhibits your plans.  Especially for high income earners and/or single income households, the “catch-up” strategy may be risky.  We have repeatedly seen high earners lose their jobs in their late 50s or early 60s and have difficulty finding another position at a comparable compensation level.
• Resist the temptation to spend to the limit. The final key to the “catch-up” strategy is having the discipline to redirect all available funds to retirement savings.  If parents are accustomed to spending all of their paychecks and are not in the habit of saving for retirement, it may be difficult to start late in life.  A study from Boston College’s Center for Retirement Research points out that parents often take advantage of their empty nest years to spend more on themselves.  In the years after kids’ graduation, they renovate kitchens and bathrooms, take trips, and go out to eat more often—which may be fine if they’ve been saving steadily for retirement, but may not be fine if they need to seriously pursue a “catch-up” strategy to get back on track.

The rule of thumb with retirement savings remains:  the sooner you make a plan, the better—even if that plan includes saving less during certain phases of life than others.  The “catch-up” strategy can work in some cases, but try not to fall completely off the retirement savings wagon, so that you are better prepared for any unforeseen financial challenges and can still celebrate the empty nester years in style.