There’s nothing that will make you focus on the here and now like having a baby. But now more than ever, you should be planning for your future. Here the Nerds offer clear advice for new parents’ retirement planning, covering:
- Why it’s important to save for retirement.
- How much you should save.
- Where to put your savings.
Many new parents neglect to think about their retirement in light of their recently arrived family member, focusing instead on college funds and diaper coupons, but unless you want to depend on your adult child to provide for you in old age, you’ll want to ensure your comfortable future as much as theirs.
How much is enough now that you’re a parent?
If you ask five people how much to save for retirement, you’re likely to get five different answers. And truly, there isn’t a single “right” answer. Your income, your ability to fund a retirement and your plans for those golden years all play a role in determining what’s “enough.” One thing that doesn’t is whether or not you have children. Ideally, when you’re ready for retirement, your children will be self-sufficient.
Financial planners often recommend you save about 10% to 15% of your income each year. And although that’s a good place to start — especially for someone who hasn’t previously thought about retirement — it may not be enough.
Simply put, new parents should continue saving for their retirement as they would without a baby in the picture, or as close to it as possible. Regardless of your parental status, you’ll want to retire one day, and having children doesn’t necessarily change your financial needs once you’re older and they’re financially independent.
There are numerous online retirement calculators that can help you ballpark your retirement needs. AARP, Vanguard and T. Rowe Price are some of the more popular. None of these calculators ask about children, driving home the fact that being a parent doesn’t change how much you’ll need to set aside. These calculators are free and easy to use, but they won’t provide the personalized advice that a one-on-one professional session would. If you’re having a hard time sorting through how much to save and the best way to go about it, a financial advisor may help.
If you can save more than your advisor or online calculator recommends, great — your retirement may be more plush than you expected, and you may be able to take the kids (and grandkids) with you on post-retirement vacations. If the recommended amount seems out of reach, aim to get as close to it as you reasonably can by reprioritizing your current expenses.
Where should you put this money?
Invest in your 401(k)
If your employer offers a 401(k) savings plan, use it. These accounts have tax advantages, allowing your contributions to grow tax free because they are taken out of your paycheck before income taxes are applied.
Watch out: The IRS sets 401(k) contribution limits. Exceeding the limit means you’ll be taxed on your savings when it’s time to withdraw them.
Contribute up to the employer match — this is free money and you would be remiss not to take advantage of it. In other words, if your employer matches contributions up to 5% of your salary, designate at least 5% of your salary.
The IRS website provides updates to these limits so you can adjust your annual contributions accordingly.
Consider an Individual Retirement Account
If you don’t have access to an employer-offered 401(k) plan or if you want to set aside money in addition to your 401(k), consider an individual retirement account (also called an individual retirement arrangement). You can set up an IRA through any number of online brokerages.
There are two basic types of IRAs: traditional and Roth. A traditional IRA uses pretax contributions, similar to a 401(k), and you are taxed when you use the money years down the road. With a Roth IRA, however, you pay taxes upfront, the contributions are allowed to grow tax-free and you can withdraw without worrying about taxation on the back end.
Watch out: You must meet certain income requirements to qualify for a Roth IRA. Also, the IRS limits all IRA contribution amounts based on a variety of factors, including your age and income.
Plan for the future in the present
Retirement can seem a long way off when you’re navigating the first several weeks of parenting. But just like your baby’s first weeks are over in a flash, so too will you be planning a retirement party before you know it.
Do your best to keep plugging away at your nest egg even as household finances change. Put away what you can by cutting optional expenses, and don’t lose track of your own long-term plan while investing in your child.