Retirement Planning for Working Moms
Being a mom is a full-time job. A full-time job is also a full-time job. Clearly then, working moms are busy. One area that is easy for a busy mom to overlook is retirement planning.
That’s unfortunate because retirement can be a very enjoyable experience if proper care is taken to ensure you are ready.
Here are a few things you can do to help ensure that you are on track for an enjoyable retirement:
Start Saving Early
The amount of time you give yourself to prepare for retirement has a significant impact on how ready you are when it is time to retire. Let’s look at a simplified example. Suppose you are saving $15,000 per year toward retirement. The amount you would have saved by the time you reach a typical retirement age of 65 if you had started at the following ages is:
|Total Savings at Age 65||Age you Started Saving|
The calculation assumes a reasonable/realistic return of 8% and does not adjust for inflation
The difference between starting at 25 and starting at 30 is $1,271,096. That’s huge!
Now let’s do some backtracking. How much more did you save to have that extra $1,271,096? Five years at $15,000 per year is $75,000. Relatively, that’s not so huge!
From 30 to 35 the difference is $885,504, again, from an extra $75,000 in savings.
The key takeaway here is that the time component of your savings is more valuable than the dollar amount of your contribution.
This is another reason it is so important to get your monthly budget in order right away!
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Research Your Options
If you are employed, chances are your employer has a retirement plan. The most common retirement plan is the 401(k). Typically, employers will make a matching contribution to your retirement account up to a certain percentage of your income. This can really help you make a good stride in your retirement savings.
As an example, let’s say your employer matches 100% of your contribution up to 6% of your salary. (The actual percentages vary by employer.) If you have an annual salary of $75,000, then 6% of your salary is $4,500. If you save $4,500 of your own money in the retirement plan, then your employer will throw in an additional $4,500. That is about as free as money gets and makes it a lot easier to build a healthy balance in your account. You can contribute less than that amount, but you will be leaving money on the table.
Self-employed people can also take advantage of retirement accounts. For small-business owners, the SEP IRA is a popular plan. This plan allows you to contribute up to 25% of net self-employment earnings to a traditional IRA, up to a maximum of $55,000. This plan is pretty easy to establish, and inexpensive (especially if you have no other employees).
Of course, the popular traditional and Roth IRA’s are available to both W-2 employees as well as the self-employed.
Develop a Plan
Once you have decided to save and have figured out what your options are, it is time to develop the actual plan. Think about what your goals are, such as when you want to retire and what you want to do when you are retired. While saving for retirement is a good thing, it isn’t a goal, but a means to achieve a goal.
Retirement age and desired income are two goals you should consider. Assigning a number to these two ideas will give meaning to your plan. This is important because you can adjust your plan to make sure you stay on track. Without these goals, saving for retirement is kind of like shooting in the dark.
Retirement age is largely a preference, but there are some practical limitations. For most people, retiring in your 40’s isn’t incredibly realistic because you simply haven’t had enough time to save. Likewise, working until you are 90 isn’t a sound plan for most of us either. Consider your own lifestyle preference as well as your family history when thinking about when you plan to retire.
The income you want to have in retirement is important as well and is really the point of saving in the first place. Once you have developed a savings plan and estimated your total savings balance in retirement, think about how you convert that balance into an income stream.
A very basic, and general, rule of thumb is that you can safely withdraw 4% of your total balance in the year you retire and make cost of living adjustments each year thereafter. The “4% rule” as it is known is a good place to start but consider your investment style and life expectancy when making your own plan.
Don’t forget to look at the whole picture. If you are married and your spouse also contributes to a retirement plan, and both of you have contributed to Social Security, then your retirement is a function of your savings, your spouse’s savings, and both of your Social Security pensions.
Does retirement seem too far off? Remember, the earlier you start planning the better off you will be.
I am an Assistant Professor of Finance at East Texas Baptist University and teach a variety of Finance, Economics, and Accounting courses. Through my retirement planning practice, I work with clients to help them get the most out of retirement.
I am an Infantry Captain in the Arkansas Army National Guard and am married with one daughter.
Feel free to reach out to me, I’d love to connect with you: