If you have children, you might not believe this (unless you have teenagers) – but parenthood could be putting your eventual retirement at risk.
But there are ways to avoid that risk.
So says a brief from the Center for Retirement Research at Boston College, which used the National Retirement Risk Index (NRRI) to gauge the impact of having children on the retirement security of current older working households.
To arrive at the NRRI, households’ projected replacement rates—retirement income as a percentage of pre-retirement income—are compared with target replacement rates that would permit them to maintain their standard of living. The calculations are based on the Federal Reserve’s Survey of Consumer Finances, a triennial survey of a nationally representative sample of U.S. households.
As of 2013, the NRRI indicated that even if households worked to age 65 and annuitized all their financial assets, including any funds they might receive from reverse mortgages on their homes, more than half of households were at risk of falling short in retirement.
Among the resources at risk in families that have children are not just money spent for their care but money lost through absence from the workplace, usually by the mother. Even when mothers stay in the workplace while raising children, the brief points out that their wages are typically lower than they would be if there were no children.
Between lower and lost wages and the expenses of food, clothing, childcare and education, studies by the Organization for Economic Cooperation and Development (OECD) indicate that the cost for a family of four is 140 percent of that of two adults.
The study concludes that children moderately increase a household’s risk of running out of money in retirement, with middle-income families most at risk.
Households can avoid poor retirement preparedness by either planning for higher consumption when children are home and lower consumption once they’ve grown and gone, or by cutting back on their own consumption in order to meet their children’s needs while those children are growing up.
Either one can translate to overall level consumption over the span of the parents’ lives, with savings remaining constant and consumption varying either by the period of time involved in raising kids or by the amount spent by the adults on themselves rather than on the kids.
But while addressing one’s consumption levels may be optimal behavior, according to the study this isn’t what most people do, and that means some people won’t hit their target retirement savings level. Even if they’re doing a lot of saving, often much of the money they’ve set aside is for the care of the children or for their education, and so the family looks much better prepared for retirement than they actually are.