Children are a joy, as any parent can attest, but they're also a huge financial drain. According to the U.S. Department of Agriculture, which each year seeks to quantify the cost of raising children, the latest tally stands at $233,610 from birth to 18, and that's before extras such as college, violin lessons, and camp are factored in.
In many cases, this added expense takes a toll on retirement readiness, concludes research from Boston College's Center for Retirement Research. The more children a family has, the less parents are able to save for retirement.
"What we're seeing is that when people have kids, they spend more, and that money is coming out of savings," said Geoffrey Sanzenbacher, a research economist at the center.
There are several ways that consumption increases when children enter the picture, Sanzenbacher said. The first is simply due to additional food, clothing, and expenses such as child care and education. There are also lost wages to be considered, and in some cases fewer career opportunities for parents, according to the center's research.
For each child that people in their 30s have, their incomes are 3.7% lower per year than those of their peers who don't have children. Further, their household wealth is 4.5% lower than that of childless households, according to Sanzenbacher and his co-authors. The difference in income and household wealth isn't quite as stark for people in their 40s and 50s.
"If you ignore the days of agrarian societies, children have not been a benefit to families' finances," said Nate Wenner, CPA/PFS, a principal and regional director with Wipfli Hewins Investment Advisors in Minneapolis. "And most parents don't fully appreciate that until they're in it."
The point isn't that people should forgo having kids in order to improve their finances. Rather, given the tremendous expenses, how can personal financial planners help make sure their clients' finances hold up to the costs involved with raising children? We asked a group of CPAs to weigh in:
- Don't go overboard the first year. It's easy to get lured into spending on designer cribs and high-tech strollers when a baby is born. A study from the financial site NerdWallet found that parents may spend tens of thousands of dollars more during the first year of a child's life.
"If families kept spending the same amount after having children, but they reduced the spending on themselves, then they could keep their savings rate the same," Sanzenbacher said. "But that's not what we're seeing."
- Consider waiting. The younger parents are, the bigger hit child rearing exacts on their finances. There are several reasons for this: First, young parents haven't yet had time to build up their savings and establish good financial habits. Second, it's difficult to make the sacrifices that career advancement often requires, such as long hours and business travel, if you have a family, said Wenner.
Parents who wait until their 30s to start a family are on better financial footing because they've already received promotions and raises and are often earning more.
"Even if you have to stop saving during those child-rearing years, you still get the benefit of the time value of money for the savings you already did," said Wenner.
But waiting too long can have its downsides too, noted Brian Preston, CPA/PFS, managing principal of Abound Wealth in Franklin, Tenn. Some health issues have been linked to older parents. While clients may have ample savings when they become parents, they could end up spending that money to pay for health care.
- Save on the dips. Throughout childhood, there are key moments when spending naturally goes down — and parents should take advantage of them, said Preston.
- Once your kid is potty-trained, what if you took your diaper allowance and started saving?" Preston said. The same goes for when a child starts public kindergarten and when children leave the nest and become financially independent.
"Unfortunately, we don't see people increasing their savings again when kids leave," said Sanzenbacher. "They just end up spending the same amount on fewer people."
- Prioritize retirement. Nowhere does the financial squeeze of child rearing come to a head more than when people try to figure out how to prioritize their savings between their own retirement needs and saving for college.
Most financial advisers come down on the side of retirement. Even though the cost of higher education is astronomical — it has grown at twice the rate of inflation since the 1980s — students still have more options for financing that expense than retirees do.
"When you look at retirement, you realize there are no loans, no scholarships, and no grants," said Preston. "It's up to you."
- Help adult children stand on their own. It's one thing to give adult children an unexpected gift from time to time, but quite another to make it a ritual. According to a 2015 Pew Research Center survey, 61% of U.S. parents said they had helped their adult children financially in the past year. That could imperil parents' own retirement readiness, said Susan Kendall, CPA/PFS, of Kendall Wealth Partners in Pacific Grove, Calif.
"I've been in this position myself," said Kendall. "When my son got out of the Army at age 22, he moved back home. Our food bill went up $500 a month."
Kendall counsels her clients to set ground rules for boomeranging kids. Among them is a requirement of a financial contribution and a timetable for how long the living arrangement will last.
And when it comes to paying children's cellphone bills or rent on an ongoing basis, Kendall urges clients not to, for their children's sake. Those young adults need to get their own financial footing.
As any parent knows, children can be expensive. But parents' retirement doesn't have to suffer if they are willing to make the necessary spending adjustments.
Ilana Polyak is a freelance writer based in Massachusetts. To comment on this article, contact Chris Baysden, senior manager of newsletters at the Association of International Certified Professional Accountants.