College graduation is a hopeful, optimistic time of transition. But the personal finance message of this column is directed at the parents of recent college graduates, especially parents about to become empty nesters. Now is also a good time to prepare for your retirement years by ramping up savings and reviewing your spending. Seize the financial opportunity opened up by your time of transition.
Except for a sliver of very wealthy people, most of us can’t get rid of the uncertainties about money during retirement. Still, we can dramatically hike the odds of living comfortably in our retirement years by taking financial advantage of the kids’ finishing school and setting up their own households. Empty nesters can easily hike retirement savings.
A recent study on the topic by the Center for Retirement Research at Boston College concluded that empty nesters do increase retirement savings, but only slightly.
Empty nesters can do much better. This doesn’t mean you have to become an extreme tightwad and penny-pinching miser in the second half of life. You can probably find some extra money to set aside with the kids out of the house without too much trouble. Parents in their 50s or early 60s still have many years to save before retirement.
What’s more, I would start planning for what you might do to earn a paycheck — probably part time — well into the traditional retirement years. Earning even a slim part-time income in your later years is another way to boost the household bottom line while adding to savings.
Here’s another way of looking at it. Say you earn $20,000 in part-time income. That’s the equivalent of a 4 percent withdrawal rate from a $500,000 portfolio.
In my experience, many people underestimate how much they cut back on spending without compromising their quality of life. Top of the expense-reduction list is getting rid of debts (another way of raising household savings). For instance, homeowners can work at eliminating the mortgage.
Embracing a frugal or thrifty lifestyle also improves household cash flow. Being frugal puts a greater emphasis on experiences and creativity and less on accumulation and things. In my files is a letter written to the New York Times that captures the essential insight: “You can get by on a lot less when you’re retired,” the writer said. “If I had known earlier how much ‘wealth’ derives from such simple pleasures, I would have retired much sooner.” There’s a financial lesson for all of us in his words.
Chris Farrell is senior economics contributor, “Marketplace,” commentator, Minnesota Public Radio.