The advice often given to those just starting out is to invest early. But kids come along, young moms and dads stay at home and retirement plans get put on hold. Today, on MomsMakingaMillion radio, we discuss the fate of the young mom and her retirement plan.
Kat Bellucci: Last week you spoke about doing a little financial spring cleaning. But it seemed that you were more focused on mid-career moms. This week, you wanted to talk about the younger moms in our listening audience.
Paul Petillo: I did in part because I know a lot about you. For instance, I know that even though you work outside the home and often feel more rushed, wishing for more time in the day, you are generally much happier than your stay-at-home counterpart or working dads. I know that if you had the option though, you would rather work part-time rather than fulltime. I know that because you are younger, you don’t hold the same conservative values as your mothers did, instead believing that both parents should contribute to the household income. I know that before you had children, the notion of working fulltime was expected but after you had kids, you worried about the long-term effects of continuing to do so while your child attended daycare.
And I know that you are less likely to invest for your future than childless women, working men and fathers.
Kat: This is a great concern to all of us. This show is focused on increasing the pay level of women to eliminate poverty in America. But younger moms face some challenges that are unique.
Paul: When young women enter the workforce, they are in what financial planners call “the window”. This is that gap between the time they graduate from college to about 35 years old. This “window” basically suggests that they can do almost anything they want with their lives. This is the golden moment in any young person’s life, the one the vast majority of us have missed and will never get back: the ability to start early.
Kat: Starting early is gospel among financial planners but by the time they get to clients, that window of opportunity to begin investing for their future early has already closed.
Paul: And unfortunately, once kids arrive, many young moms nail that window shut. Not that kids are a bad idea; they simply cost a lot. And if you have taken time off from work to raise them, or considered returning to work in a part-time capacity, chances are you have not given your retirement any consideration at all.
Kat: Perhaps we should scare them with some hard numbers.
Paul: Starting early is one thing. Staying focused is another. As to the hard numbers, consider a 20 year old who invests no more than $5,000 a year every year for the next 40. That sounds like a lot but when you break it down amounts to about $14 a day. If they were to invest that amount, without interruption they would have about $600,000 at retirement. Now that is using an IRA or individual retirement account. If they have access to a 401(k), even if they are working part-time, they could, in theory, sock away three times that amount.
The trick is to do it religiously, every week of every year for the rest of your life.
Kat: So what is an at-home mom, who may have been taking a few years off to get their children on the right track supposed to do?
Paul: This is where the working dad comes in. Everyone agrees that both parents should be working. But that is not always possible. Kids create financial issues for both parents. Any sort of work interruption should be felt by both members of the team. If the wife is forced to leave or cut back on her time in the workforce, the husband should begin making her retirement contribution for her. This also applies if it is the dad who takes the time off.
This essentially does two things: It protects the retirement future of the mom who has taken time off to raise the kids and secondly, brings the cost of the child inline with reality. We know that raising a child can cost hundreds of thousands of dollars but the vast majority of us shrug off these costs.
Kat: You mentioned last week that parents who have found their current financial standing might not allow the full funding of their children’s college education. What should younger moms do?
Paul: They should consider their income, both present and future. If the household income is below $80,000, they should focus on the pre-college investment of their children, giving them all of the advantages that build a better student. The cost of lessons and activities can greatly impact the average budget – if they are trying to save for college as well. The better the student the better the opportunities of scholarships and grants. It also allows them to keep them invested in their own retirement.
We always want the best for our kids. But the risk of under-funding our retirement plans to do so is just not money smart. So the best advice: keep investing in your future first.
Kat: What’s up for next week?
Paul: How about we take a look at the changes taking place in your 401(k) plans as new regulations are being put in place.
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