As one of financial planner Lauren Lindsay’s clients neared age 50, she advised the father of five-year-old twins to extend his term life insurance through the children’s college years and to purchase the extra coverage before his milestone birthday to avoid higher premiums.
“And he’s going to be working until 70,” after the children have graduated college, she says.
As more Americans delay marriage and babies, growing numbers of parents are poised to hit the traditional retirement age just as their children reach college age. Saving for two of life’s biggest expenses is challenge enough for many parents, but can be more so for those who bring a baby home after 40.
While new midlife parents may bring a special appreciation and years of wisdom to their postponed families, age-related hurdles can hit bank accounts, and snag retirement and estate planning, requiring difficult decisions. The college-retirement overlap is particularly tricky, and more than a few people are likely to face it.
Of 15.5 million U.S. households with children younger than age six in 2010, nearly 3 million, or some 19 percent, had parents or step-parents aged 40 or older, according to the U.S. Census Bureau. Households with children this age and parents aged 40 to 44 outnumbered those with parents aged 20 to 24.
How 40- or 50-somethings with young kids prepare financially for retirement and for a college price tag that can reach well into the six figures depends on each family’s circumstances, and may mean working longer or cutting expenses. Financial advisors tend to agree that parents should make retirement savings the higher priority.
“Always, for me, the retirement comes first,” says Lindsay, director of financial planning at Covington, La.-based Personal Financial Advisors, who had her first child at 39 and has several clients in their 40s or 50s with young children.
Students can get college scholarships and loans, while retirees don’t have those options for funding their golden years, planners note. Also, well-set parents can tap or borrow against retirement accounts to help pay for college.
“The kindest thing a parent can do for their child is fund their own retirement and let the child pay for their own education,” says certified financial planner (CFP) Rick Kahler, president of Kahler Financial Group in Rapid City. A child would spend two to five times more caring for an elderly parent who didn’t plan for retirement than they would for their own college education, he says.
“There seems to be a societal money script that if you’re a good parent you will fund your child’s education, so I see very few people who come to me that have chosen to fund their retirement over their child’s education,” says Kahler, 56, the father of a 10-year-old and a 14-year-old. “In fact, I can’t think of anybody.”
Kahler tells clients they may be doing their kids a favor to let them work their way through college or pay for half of it. “They may be giving their child a huge gift in focus and self esteem, and that can be a good thing,” he says.
Often, Kahler says, clients write a tuition check, then charge groceries on the credit card. “Unfortunately it’s the rare person that actually saves for their kid’s college education, or that cuts their lifestyle to pay for it,” he says.
Nonetheless, the picture can be rosier for middle-age parents.
“As an older parent, you’re usually a little more financially established than a younger parent,” says financial planner Lindsay, noting that many older couples are dual earners who had children later because the woman was working on her career.
On the other hand, she says, they haven’t necessarily been saving for those 20 working years and may have student loans, so they must save aggressively.
“Most people are grossly under-saving,” CFP Kahler says. Someone 30 years from retirement needs to save 17 percent of salary to maintain his or her lifestyle for 30 years after leaving the workforce, and someone who starts saving at 50 will need to save 30 percent of income to have any chance at retiring, he says.
Kahler suggests those anticipating babies carefully plan their cash flow, taking into account the new child-related expenses, cutting spending as needed. Generally, he says, parents with young children should have $1 million in life insurance and also need disability coverage.
Many older parents may be unaware of one potentially helpful tool.
Make Social Security Work for You
Each minor child of a retiree age 62 and older may receive Social Security benefits equal to a significant percentage of the parent’s benefit without reducing the retiree’s share. Nonworking younger spouses caring for children also may be eligible, although there is a family maximum, says Linda Campbell, senior financial planner with Budros Ruhlin & Roein Columbus, Ohio.
Campbell works with such a family with two young children; combined, the family receives about $4,600 a month in Social Securitybenefits.
Beyond the retirement and college-planning decisions, middle-aged parents may be caring for their own frail, elderly parents at the same time they’re raising preschoolers, a potentially costly prospect that points to another issue: No built-in support network of youthful grandparents who can babysit during parental getaways. CFP Kahler knows this first hand.
“Our childcare bill is as much as our airfare bill,” he says. Trading childcare with other families can defrays the costs, though, he adds.
The age factor similarly can make it difficult for middle-age parents to find willing and able guardians to name in their wills. Lindsay recalls a former client couple in their 40s with young children who had trouble completing their estate planning because they had only older siblings and no one willing to be named as guardians.
“Sometimes it just comes down to making the best decision out of a number of poor alternatives," Kahler says. "It may mean sending them out of state to someone, you may be looking to nieces and nephews who could potentially raise a child.”
Older-parent families can face other advantages and disadvantages, as well.
“I think my kids will need less therapy than if I’d had kids in my 20s,” Kahler jokes. On the other hand, he notes there are costs associated with the care of an aging body. “I tell my kids, `The horsey can only go up and down the hallway a couple of times before the horsey runs out of gas.’ ”