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Funding a child’s college tuition can cost a small fortune that drains away potential retirement funds. Grown children who move back in with their parents after graduation can further deplete money Mom and Dad otherwise might use for retirement savings.
So, does having kids necessarily doom your chances of a comfortable retirement?
It depends whether you’re willing to rein in your spending on yourself enough to compensate for the costs of raising a kid, according to a recent analysis by the Center for Retirement Research at Boston College.
The analysis identified two ways to accomplish this feat.
For the analysis, the center used its National Retirement Risk Index to evaluate how having children affects the retirement security of older working households.
This index measures the percentage of working-age households at risk of being unable to maintain their pre-retirement standard of living during post-work years. The factors that the index accounts for include:
- Whether a household has two earners
- Education level
- Whether a household has a defined-benefit or defined-contribution retirement plan
- Whether a household is saving for children’s educational expenses
As it stands, 52 percent of households are considered “at risk,” based on the index.
The bad news
The Center for Retirement Research’s analysis concluded that having children “moderately” increases a household’s odds of being at risk of financially falling short in retirement.
By the time parents are in their 50s, each child increases this risk by 2 percentage points. So, the risk for a household with two children would be 4 percentage points higher than for a household without children.
As far as household wealth is concerned, each child is associated with a decrease of roughly 3 to 4 percent. The analysis states:
“Researchers agree that parents divert considerable resources to their children when the children are young. These resources involve time out of the labor force — usually, for the mother — and direct expenditures on children.”
The center notes that women who have children are less likely to work for pay than those who do not have children. According to the center, 61 percent of women with children work, compared with 73 percent of women without children. Additionally, women with children earn less money than women without children — a median income of $35,000 per year, compared with $44,400.
The good news
Having children does not automatically doom your odds of a comfortable retirement. The Center for Retirement Research writes:
The bottom line is that households with children would be expected at the end of their work-lives to have less income and lower wealth. However, neither of these outcomes is necessarily related to their retirement preparedness.
The center’s analysis notes two ways you can afford to retire comfortably despite the costs of raising children:
- Cut your spending while the children are at home. This requires you to sharply curtail spending on yourself while you have children at home to compensate for the spending on your children.
- Cut your spending after the children leave home. This requires you to lower spending after your children leave the home to compensate for the spending on your children.
Of course, reining in spending is easier said than done at any point in life. The center does not try to dance around this reality, concluding:
“… households may not behave in this optimal way, instead raising their total spending when they have children and then trying to maintain this higher spending path even after the children are gone. These households may be headed for trouble in retirement, because they have not saved enough to maintain the standard of living to which they have grown accustomed.”
Another glimmer of hope in the findings is that having children has a “considerably smaller” impact on a household’s risk of falling short in retirement compared with several other factors.
By far the most impactful factor is having an employer-sponsored retirement plan — which reduces a household’s risk of falling short in retirement by about 40 percentage points.
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