KidsInTheHouse the Ultimate Parenting Resource
Kids in the House Tour

How to Invest For Retirement as a New (or Future) Parent

investing in retirement as a new parent

As a new or expectant parent, you probably have a lot on your mind. You might be thinking about an upcoming doctor’s appointment, vitamins for you and the baby, whether your baby is eating right, or why your baby does not stop crying. 

On top of that, you have to think about your personal finances too. Yes, no one ever said that parenting is easy. Aside from your child’s future, you have to think about your own future as well. The beauty of having children, however, is they don’t stay babies for long. Eventually, they will grow up and become independent and they would be able to finance themselves too. 

By that time, you will be probably in your 50s or 60s. At this stage, you would still need money to support yourself. So, even if your children are still very young today, investing in your retirement is very important. Read ahead to learn how to invest for retirement as a new or future parent. 

Why Should You Save For Retirement as a New Parent?

Many people neglect to think about retirement until they begin nearing middle age. Add a new child into the mix, the thought of preparing for retirement will always be the last thing on a parent’s mind. Children’s basic needs and educational expenses would usually be the priority.

But the truth is, if you do not begin saving for retirement in time, you could end up working at least part-time for the rest of your life. So, the sooner you begin saving for retirement, the more fruitful your savings account will be when you decide to retire. 

Your savings account earns compound interest over time— interest on your initial deposit plus the interest you have already accumulated—so the longer you keep the money in your account, the faster it will grow. 

If you start saving at the beginning of your career, you will be able to spend your golden years in comfort, and not worry about how you will get by. Therefore, if you are a new parent who has not yet begun saving for retirement, now is the time to start. If you already have a savings account or IRA in place, you should continue investing as much as you can before a new baby comes along.

How Much Should You Save?

Financial advisors have different opinions about how much you should save for retirement. Since the value of the dollar changes each year, it is difficult to predict what the cost of living will be in 20, 40, or 60 years. What may be enough to retire comfortably now could barely cover base expenses by the end of your career. 

Additionally, there is no one-size-fits-all savings rule that works for everyone. Different lifestyles and your current monthly expenses will affect how much you can and should save for retirement. That said, many financial planners recommend setting aside 10% to 15% of your pre-tax income towards retirement each year. Others recommend saving one year of salary by the time you reach 30, two times by age 35, and so on.

If these general savings rules do not work for you, you may choose to use an online retirement calculator to do the math. These calculators take your income, 401K, and household status into account to determine the amount you should be saving each month. 

Whatever savings plan you decide to follow, you should make it a goal to increase the amount you set aside each year as your income stabilizes or increases as well. Ideally, you should save more than what your financial planner recommends so that you’ll have a cushion to fall back on during your retirement years. 

How to Invest Retirement Savings

Sure it’s important to save for retirement and maximize how much you set aside, but it’s time to discuss the smartest places to park or invest your savings. In other words, you have to know how to put your money to work.

Keeping all of your retirement money in a low-interest savings account may do more harm than good. If your account’s interest rate does not match inflation, your money will decrease in value over time. 

Instead, you should keep part of your savings in an investment account that will grow with inflation rates—or exceed them—to maximize your withdrawal amount. 401(k)s and Individual Retirement Accounts (IRA) both utilize these investment principles of growth. Hence, they are really good financial instruments to consider for your retirement plan.

Take Advantage of a 401(k)

A 401(k) is the most popular type of employer-sponsored retirement plan. Many employers offer these plans as benefits to employees, alongside healthcare or paid time off. 

If your employer offers a 401(k), you can choose to set aside a percentage of your income through automatic payroll deductions. Your employer will invest the money you contribute in your choice of mutual funds, allowing it to grow over time. 

You do not have to pay taxes on your 401(k) investment earnings until you withdraw your money. As a result, contributing to a 401(k) lowers your taxable income, a concept that encourages many people to begin saving for retirement early on. 

Employers may choose to match the percentage you set aside, invest a different amount, or not invest any money at all. If they match your contribution, you should contribute the maximum amount.

Even if your employer does not match your retirement contribution, you should still set aside as much of your income as you can afford each month. Since this investment is automatically deducted from your paycheck, you may not even notice its absence. 

Open an Individual Retirement Account

An IRA is another savings tool that helps people set aside money for retirement. These accounts are beneficial for stay-at-home parents who do not benefit from an employer-sponsored retirement plan.

If you do not have access to a 401(k), an IRA is the next-best savings account for your retirement. And even if you contribute to a 401(k), an IRA could give you the extra boost you need to acquire enough money for your golden years. 

IRAs work similarly to 401(k)s. To maximize your retirement savings, you should invest a portion of your income each month in your IRA. These investments may take the form of stocks, bonds, ETFs, mutual funds, or other financial assets. 

Investing your income will allow it to grow over time and beat inflation. IRAs are also tax-deductible. You can open an IRA through an organization that has gained approval from the IRS, such as banks, brokerage companies, credit unions, or loan associations. 

It’s also important to know that there are different types of IRAs, and these are the Traditional and Roth types. 

Traditional IRA

Traditional IRAs are the most commonly used type. Money that you contribute to a traditional IRA is tax-deductible, meaning you can decrease your taxable income each year by the amount you set aside in the account. However, once you begin withdrawing from the IRA, the federal government will tax the funds at the same rate as a regular income. 

Many people choose to open a traditional IRA instead of a Roth IRA because these accounts have no income requirements. Anyone over the age of 18 who has a source of income can open a traditional IRA and begin saving for retirement. 

However, one drawback of traditional IRAs is the strict guidelines these accounts place on withdrawal. You cannot withdraw your funds from your IRA until you reach at least age 59 ½. Similarly, you must begin withdrawing a minimum amount of money from your traditional IRA by the age of 72. 

Though these guidelines may be advantageous for those who have trouble saving money or taking a hands-off approach to investments, others may view them as too rigid for their retirement plan. However, traditional IRAs are still considered smart, practical accounts, especially for a long-term purpose like retirement. It is also very accessible and opening an account is definitely not a hassle.

Roth IRA

Many people choose to open a Roth IRA instead of a traditional IRA if they meet the minimum requirements. To open this account, you must not exceed the income limits of $124,000 for single individuals and $196,000 for married couples. 

Roth IRAs offer more freedom over your funds than traditional accounts. You can withdraw your contributions from these accounts at any time without penalty. If you need to pay for education, disability, housing, or other qualified expenses, you can withdraw your earnings tax-free and will not entail penalties if you do it five years after your first contribution.

Unlike traditional IRAs, Roth IRAs do not require you to withdraw a certain amount by a specific age. And as long as you meet withdrawal requirements, you will not have to pay taxes on your funds—unlike the traditional IRA.

 

Start Planning Now

Though investing for retirement may not be your top priority as a new parent, it is just as important now as it will be in 20 years. Planning and setting aside funds for your retirement now means that you will not have to worry about them when you reach the end of your career. 

You can comfortably live out the rest of your life, spend time with your family, and have peace of mind as you reach retirement age. And if you leave enough cushion in your account, you can even bring your kids along on your post-retirement vacations. They will appreciate and even learn from your financial habits as well!

Chris Muller's picture

Chris Muller is a professional personal finance writer who has written for some of the largest financial publications in the world. Chris brings a BBA and MBA in Finance, along with a decade of experience in the field, to help break down complex financial topics into easily digestible pieces through his written content in an effort to assist others in better managing their finances. Chris is currently in pursuit of FI/RE, is an aspiring minimalist, loves craft beer, and is a dad to two kids.