The Hidden Value of Social Security Disability Insurance: Why It’s Important During Benefits Enrollment
It only makes sense—when your children leave home for good, it’s time to increase savings. You will obviously spend less with fewer family members in the home. Therefore, if your home isn’t fully paid for, you increase your mortgage payment significantly. And then you dramatically increase your 401(k), or you sock away thousands through other types of savings accounts. Life is good.
When your children leave home, you are likely in your 40s or 50s, so you take advantage of reduced consumption and ramp up for retirement. Life is good.
But there is only one problem: You don’t do any of these things.
A recent study focused on the savings of empty nesters reveals that the aforementioned types of enhanced savings rarely occur, and when they do, they are often negligible.
When Children Leave Home
The study found that:
- Households increase contributions to 401(k) plans by 0.3-1.0 percentage points when the children leave home.
- Home-owning households whose children leave home make smaller post-kid mortgage payments than predicted.
The Splurge Urge
For empty nesters, the urge to splurge is understandable. According to the latest government figures, families with incomes of $106,540 or more spend an average of $20,000 to $25,000 a year on each child under the age of 18—not counting college costs. After years of such spending, many parents feel they can spend on themselves.
The Retirement Crisis Is Real
The findings support the view that the retirement saving crisis is real, as the evidence suggests that households do not increase their savings very much when the kids leave home. Instead, they hold total consumption relatively constant, thereby increasing per-capita consumption.
This response would be fine if households had adequate savings. But most households in their 40s and 50s have saved very little for retirement.
When Your Children Leave Home, Close the Gap
Where will you find additional savings if you can identify with the urge to splurge once your children leave home? Here are some suggestions:
Maximize Contributions
Contribute the maximum allowed to your retirement accounts, including catch-up contributions if you’re age 50-plus. If you’re still working, take advantage of company matching (if available).
Work Longer
Putting off retirement can give you more time to save, more time for your savings to grow, and more time to utilize your employer benefits (such as healthcare).
Cut Down Expenses
While this should be easier once the kids leave the house, it’s a good idea to start preparing before then, to help make the transition easier.
Start by creating a new budget, discussing downsizing options, and setting up automatic transfers of the money that used to be spent on the kids to your retirement accounts. That way, you don’t get used to having the extra funds.
Delay Social Security
Waiting to claim your benefits will increase the amount you receive each month. If you delay beyond the full retirement age, you can earn retirement credits, which can increase your benefits by a certain percentage (depending on your date of birth).
Save In the Right Accounts
Educate yourself about investing and the different types of retirement savings vehicles to make sure your money is in the right place.
Free online calculators can provide a quick look at your retirement readiness and, if you’re behind, give you an idea of how much more you may need to save to improve your forecast.
Protect Your Income
All five of the above suggestions depend heavily upon the ability to protect your skill to make money. If you depend on your income to pay the bills or support your loved ones, you need disability insurance coverage to protect you financially. A disability insurance policy covers a certain percentage of your income during the time you’re unable to work. And if you are behind in retirement savings because you “partied” a bit after after your children flew the coop, the last thing you need is a complete loss of income.
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