Financial Planning, Retirement

Having Children Does Not Have To Ruin Your Retirement

9/28/17 8:00 AM

iStock-587953870.jpgHaving children can be a wonderful experience and likely something that more households will need to do to support economic growth in the coming decades. However, having children can also be very expensive, something many parents are probably well aware of. In fact, the U.S. Department of Agriculture estimated that it will cost $233,610 to raise a child from birth through age 17 for a middle-income, married couple. Such outlays are significant and it is therefore easy to assume that raising kids can greatly interfere with an individual’s ability to set enough money aside to ensure a comfortable and financially secure retirement.

A new study by Boston College’s Center for Retirement Research (CRR), though, suggests that retirement preparedness does not necessarily have to suffer for households with children. Specifically, the CRR’s National Retirement Risk Index (NRRI) uses Federal Reserve data to estimate the percentage of working-age U.S. households who are in danger of being financially unprepared for retirement. The most-recent update to this index revealed that “even if households work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes,” more than half (52 percent) will still be at risk of being unable to maintain their pre-retirement standard of living during retirement. That varies from 59 percent for households in their 30s to 45 percent for households in their 50s.

Those figures are far from encouraging but the researchers found that having children was not a major factor behind many Americans’ general lack of retirement preparedness. The regression results, for instance, showed that by the time households are in their 50s each child increases the share of households at risk in retirement by 2 percentage points. To put this another way, the NRRI for households with two children should be 4 percentage points higher than for a household with no children. Compare that to simply being a two-earner couple, which can increase retirement risk likelihood by roughly 18 percentage points due in part to lower Social Security replacement rates, according to the researchers.

More importantly, any retirement challenges resulting from having children appear to be quite manageable. For example, saving ahead of time for a child’s education adds to a household’s wealth and was found to reduce the likelihood of being at risk in retirement by 14 percentage points. Even more effective is having access to an employer-sponsored retirement plan, which in some cases was found to lower the likelihood of being at risk by 40 percentage points. The researchers added that “if households cover the costs of childrearing by spending less on themselves, they can remain on track for retirement,” but stressed that households that do not behave in this optimal way “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.”



Sources: U.S. DoA, Bloomberg, Boston College

Post author: Charles Couch