If you find yourself raising grandchildren, you need a plan for managing your finances so that your retirement doesn’t get pushed to the back burner.
Taking on the responsibility of raising a grandchild is a major challenge, emotionally and financially. Approximately 2.7 million grandparents are primary caregivers for their minor grandchildren in the U.S., according to the Census Bureau and 10% of children nationwide live with a grandparent.
In terms of the cost, the numbers are staggering. The most recent data from the USDA put the total cost of raising a child from birth to age 18 at $245,430 in 2013. For 50- or 60-somethings, the added expense of child rearing – for a second time, yet – can eat up any extra cash they may be saving for their later years.
If you find yourself stepping back into the parental role later in life, here’s what you can do to keep your retirement plan intact.
Rethink Your Time Frame
If you’re still actively working, the first thing to consider is whether you’ll still be able to retire on time. While working longer may not be ideal, having a steady paycheck for a few more years means you won’t have to tap into your savings right away. Not only that, postponing your retirement by few years can help you when it’s time to begin drawing Social Security.
Waiting longer to claim Social Security increases the amount of benefits you’re entitled to. For example, if you were born in 1951, you’d reach full retirement age at 66. If you were to wait until you were 67, you’d receive 108% of the monthly benefit. Pushing your retirement back to age 70 would bump your benefit amount up to 132%. (For more, see Tips on Delaying Social Security Benefits.)
Staying on the job longer also gives you more time to funnel money into your 401(k) or IRA. As long as you’re working, you can continue deferring part of your salary into your 401(k) or a Roth IRA. If you have a traditional IRA, however, you won’t be able to make new contributions after age 70½.
Give Your Investments Another Look
Moving towards more conservative investments such as bonds is important as you get closer to retirement age. But when you’re raising grandchildren, playing it too safe can work against you. For investors who depend on their portfolio to generate income, it’s important to strike the right balance between investments that deliver solid returns and those that come with a minimal degree of risk.
It’s also crucial to minimize fees as much as possible to ensure that you’re getting the most out of every dollar you invest. Steering away from actively managed funds in favor of low-cost exchange-traded funds (ETFs) or index funds, for instance, can reduce the drain on your assets. (For more, see These Low-Cost Mutual Funds Have the Best Returns.)
Don’t Forget About Tax Planning
Raising grandchildren can have a significant impact on your taxes, which can work in your favor where retirement is concerned. First, it can open the door to new tax benefits, such as the Child Tax Credit and the Child and Dependent Care Credit if you’re paying for childcare expenses while you continue working. (For more, see Tax Credits for Families.)
You may also see a change in your filing status. If, for example, you’re separated or divorced, you may be able to claim Head of Household, which would entitle you to a higher standard deduction, as well as a lower tax rate, than you’d get with a single or a separate married return. The more credits and deductions you’re able to claim, the more you can reduce your tax liability and free up more money to tuck away for retirement.
One thing to keep in mind, however, is if you have a 401(k) or traditional IRA and are no longer working, you’ll have to begin taking required minimum distributions (RMDs) at age 70½. If you don’t withdraw the required amount, you’ll be subject to a 50% tax penalty. As you’re planning ahead for taxes with grandchildren, you’ll need to factor in how RMDs will offset any benefits you’re getting from claiming child-related tax breaks. Read 6 Important Retirement Plan RMD Rules to help strategize the best approach.
The Bottom Line
Parenting is a never-ending job, and it can be even more difficult the second time around if you’re not financially prepared. While it’s important to ensure that your grandchild’s needs are met, they shouldn’t come at the expense of your retirement. Keeping the focus on your long-term goals may be difficult, but it’s a must if you want to stay on solid financial ground.
Read more: Retirement Planning When You’re Raising Grandkids | Investopedia http://www.investopedia.com/articles/personal-finance/031516/retirement-planning-when-youre-raising-grandkids.asp#ixzz42yezDmUc
Follow us: Investopedia on Facebook