Why American retirees are returning to work
A new study from the Employee Benefit Research Institute shows the rate of return to work among retirees in the United States.
Retirement planning in the United States is primarily focused on providing for the retiree’s living expenses.
What happens if you drop your child in?
Americans are having children later in life and potentially more likely to retire before their children reach adulthood. According to KFF, more than 4 million school-age children live in households with older adults.
“This topic is going to come up more and more,” said Patrick Huey, a certified financial planner in Naples, Florida.
You won’t find much literature online about retiring with children. But retirement planners say it’s a topic worth considering because retirement can be very different if your plan includes school-age children.
There are at least two different categories of retirees with dependent children.
One group consists of parents who retired at a relatively young age, perhaps due to military work or financial benefits. Another group of parents have children later in life, so their typical retirement date arrives before their children are grown.
Retiring while your children are still in school can cost you a lot of money
Either way, retiring with school-age children can be financially risky. It can take years of planning to get it right.
Laurie Allen, a certified financial planner in Hermosa Beach, Calif., has a 2-year-old child. She is 43 years old. Before the baby was born, I was planning on working “on a voluntary basis” after age 55, but now I’m not so sure.
Allen said thinking about retirement with her college-age children “was really, really scary in a way I didn’t expect.”
Kelly Renner, a certified financial planner in Augusta, Georgia, works with a couple who work for the federal government in nearby Fort Gordon. They often retire with school-age children. And that requires preparation.
“The people I talk to start planning in their 20s, and they’re planning to retire in their 40s, and if they have kids, that’s part of the plan,” she said.
Mr. Renner’s typical client fully funds a 529 college savings plan to cover their child’s higher education costs. They max out contributions to Thrift Savings Plans, the government’s version of a 401(k). They often earn income from rental properties.
All of this is to prepare for retirement, which could last 40 or 50 years, including the children’s college years.
“It doesn’t matter how young the kids are,” Renner said. “It’s about how much it costs.”
If you think you might retire before your children are adults, here are five questions to ask yourself now.
How do I pay for university tuition?
According to the Education Data Initiative, four years of higher education costs an average of more than $150,000.
Most families pay for college through a combination of loans, income, and savings. If you’re retired, you’re likely on a fixed income and your savings will be used to fund your retirement. And if we borrow money now, who will pay it back?
“The red flag for me is when people come to me and say, ‘I want to do this. I don’t have 529 savings, but I have retirement,'” Huey said.
He said college savings plans are critical for retirees to help cover their children’s higher education costs.
But there are other ways to pay for college. One is to get kids into community college. Two-year colleges typically cost just a few thousand dollars per semester and can get your child halfway through a bachelor’s degree.
How do I pay for health insurance?
Many retirees plan to retire around age 65, so their workplace benefits end when Medicare kicks in.
However, federal health insurance programs typically do not cover children.
Financial advisors say if you retire with school-age children, you’ll probably need to buy health insurance for them.
According to a Forbes analysis, private health insurance for children costs between $300 and $400 per month. Low-income families may be eligible for state-administered federal children’s health insurance programs.
“Health insurance can be a big hurdle,” says Joseph Piszczor, a certified financial planner in Washington, Pennsylvania.
When should I claim Social Security?
Having school-age children in retirement can change the calculations when choosing to collect Social Security.
Retirees can claim Social Security benefits as early as age 62. Your monthly benefit check increases as you get older, peaking at age 70.
Financial planners typically advise retirees to hold off on their retirement savings so they can take advantage of larger checks later.
But let’s consider a little-known fact. Your child may also be eligible for Social Security.
According to AARP, nearly 4 million children receive Social Security benefits because their parents retire, die or become disabled.
Typically, children can receive up to half of their parents’ Social Security benefits. Supplemental benefits usually end at age 18.
Will you use your retirement savings for your children?
Ideally, a retirement savings account is intended to support you, the retiree, not your dependent children.
But if you’re retired and have children in school, it can be difficult to avoid tapping into those savings.
If you retire before age 59 1/2, you will generally be subject to taxes and penalties when you withdraw money from your tax-advantaged retirement account.
“If you’re retiring at 55 or 50, you have to ask yourself, ‘Where is my income coming from?'” says Crystal Cox, a certified financial planner in Madison, Wisconsin.
After age 59 1/2, the penalty goes away, but the money is supposed to fund your retirement.
Huey, a Florida CFP, believes it’s a mistake to use your retirement savings for your children. If you take an IRA for education or baseball travel expenses, you risk depleting your savings later.
“The greatest gift you can give your children is not to move with them,” he says.
Have you consulted a financial planner?
Without dependents, it’s very difficult to plan for retirement. If you plan to retire with school-age children, experts say it’s wise to consult a financial advisor to help you plan.
“This is completely different from a typical retirement plan,” Piszczor said.
