5 Ways Your Children Can Influence Your Retirement

Posted by Rick Miller on September 8, 2014

We often ask our clients “What is important to you in life?” While priorities and preferences vary, the majority of our clients cite “family” as a primary value.

Couples who include children in their lives face fundamental differences in their financial life cycle, which affect their retirement in a number of ways.

• Consumption Spending. Since children can bring with them costly expenses such as sports, music lessons, tutoring, summer camps, etc., a family’s consumption spending usually increases while the children are at home. In order to afford this higher level of spending, families must plan to spend less after their children leave home (and possibly even before they arrive). Neglecting to plan can result in a delayed retirement date or a lower standard of living in retirement. Consider how having children might increase consumption spending and ultimately affect your future assets.

• Employment. Once children arrive in their lives, it is common for one or both parents to reduce their commitment to work during their prime earning years, which can cause earnings to decrease just as consumption spending increases. Families that make this choice may spend at a level that depletes almost all household income every month. They can manage the impact on their future retirement funds with careful planning. If the home spouse intends to return to work at some time in the future, it may make sense for them to continue to work part-time to help maintain their earning power.

• Saving. It is no secret that children are expensive. Accordingly, just as childrearing drives consumption spending up, it reduces saving potential. Total savings at retirement will naturally be lower for families with children, especially those families who invest significant financial resources in their children.

• College. Costs of childrearing are expected. However, college comes quickly and can cause a family’s spending to skyrocket. Often, in an effort to provide their children with a good education, parents will take out and co-sign on student loans to pay the tuition, effectively increasing their spending above their earnings. For many families, since college occurs at a time when most parents are in their prime earning years, it is important to think about how the cost of college may reduce saving potential. Any parental contributions to college reduce their retirement resources, and the amount they can spend then.

• Unexpected Circumstances. College may not be the last child-related financial expense for parents. While paying for a wedding and assisting with a house down payment may be relatively predictable, circumstances such as a child’s bad marriage or serious illness may come unexpectedly. Further, some children never achieve full independence and continue to rely on their parents for full or partial support well into adulthood. This increase in unforeseen child-related costs can have a major impact on a couple’s retirement plans.

Since children are an important life project for many couples, Sensible Financial^® families understand that children have a pervasive impact on financial preparations for retirement. These families take their intended spending on their children into account when planning their living standard both before and during retirement.