Navigating retirement planning has many different avenues. One path with many unknowns is the path that includes raising a family. With the added complexity of raising children many unexpected costs arise. Medical and educational expenses easily top some of the most expensive costs a parent or guardian may face. Neither is something to ignore and costs differ greatly between individuals. Depending on the size of the family and living conditions, the cost of housing, grocery expenses, clothing and general day to day costs may increase significantly. The drain on income piles up rather quickly and sometimes, it seems, without an end in sight. Add in the cost of saving for retirement and this becomes a daunting task.
A middle class family can expect to spend over $300,000 to raise one child to age 18. When considering the cost of raising one child, let alone multiple, foregoing retirement plan contributions seems like the quick and easy solution. In fact, this is in direct contrast with the correct path to take. When considering the financial standpoint of the parent’s retirement account, continuing to contribute is paramount. If the individual does not continue to contribute, the value of time invested in the market is lost, dollar cost averaging loses its benefit, and any employer match offered is left on the table to name a few negative affects this has. These valuable tools remain unused, and the balance of the retirement plan suffers greatly.
Moving beyond the initial cost of raising a child, higher education costs typically come prior to the parent/guardian retiring. With this timeline, one may consider this a more urgent cost than saving for retirement. Often the parent may stop contributing to pay for higher education or even take a loan or withdrawal from the accounts. This can be detrimental to the health of the retirement plan. Reducing the amount of contribution loses the benefit of compounding returns; the loan amount is no longer invested and must be paid back. If not paid back, the withdrawal may have high tax consequences. Keep in mind the child has time on his/her side to pay for the loan, save for retirement and enjoy an overall prosperous life, while the parent will run out of time much sooner to pay for retirement. Once retired, income mainly ceases and so does the ability to add funding to retirement accounts. If the loan is not paid, typically it will be considered a distribution. The child’s education may be paid for but the parent is left eating peanut butter and jelly sandwiches and not by choice.
Consider the benefit of having a child work. The child can help to pay for extracurricular activities or general spending money. This teaches the child important money management skills necessary for later in life. Simple tasks like walking the dog or mowing the lawn that a person may pay a company to do can become the child’s task. This helps develop not only self confidence in the child, but can potentially teach entrepreneurial skills.
Careful budgeting and small sacrifices coupled with ongoing savings for both retirement and potential higher education costs as early as possible will have a snowball effect on long term goals. Deviating from constant retirement savings will easily derail the happy and comfortable golden years so many people look forward to.
As always, it is important to consult a tax or investment professional before making these important decisions.
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