Kids Figure into Retirement Plans

The grocery shopping for five is over, the family cell phone plan has been canceled, and the college tuition has been paid one last time.

So what’s next?

Newly minted empty nesters, having poured a couple hundred thousand dollars into raising each child, respond to their financial liberation in one of two ways. Some start saving more for their golden years. The others keep spending at that elevated level – but this time on themselves.

This personal decision, made at the critical juncture in the pre-retirement years, will have consequences for retirement – save more and things could turn out pretty well, or keep spending and jeopardize financial security in old age.

In the aggregate, at least some older households are taking the second approach. An analysis by the Center for Retirement Research at Boston College, finds that having children translates to “a moderate increase” in the risk that their standard of living will fall after they retire.

The researchers looked at the financial implications of kids from two angles. First, they used household data to estimate the sacrifices parents make – in the form of lower income – while they are raising children. Then they looked ahead to their retirement finances.

Compared with childless couples, parents in their 30s and 40s have about 3 percent less income for each additional child – some of this loss occurs when mothers work part-time temporarily or take time out for childbearing and childrearing. The income gap between parents and childless couples closes when parents reach their 50s and the kids start leaving the roost.

Less income over a lifetime translates to less wealth: parenthood reduces wealth by about 4 percent per child for workers ages 30-59.

The effects of children persist even after the transition from work to retirement.

About half of U.S. workers are facing the risk that their standard of living will decline in retirement, according to the study.  Each child raises that risk by 2.5 percentage points for workers in the middle class.

Since so many Americans are behind the 8-ball when it comes to retirement planning, it’s wise to get serious about saving after the kids leave home – and while you still can.  Once the kids are gone, the parents who fail to curtail their spending “may be headed for trouble,” the researchers warned.

Squared Away writer Kim Blanton invites you to follow us on Twitter @SquaredAwayBC. To stay current on our blog, please join our free email list. You’ll receive just one email each week – with links to the two new posts for that week – when you sign up here.