Kids can be expensive—here’s how to childproof your retirement
From housing to health care to basic needs, the cost of raising a child in a major U.S. city from birth to age 17 often exceeds $500,000, not including college.
Regardless of the exact figure, having children comes with a price tag. And aside from the typical costs of raising a family, there are a few other ways that your children factor into a smart retirement plan.
Consider these six ways that your children can impact your retirement and how you can plan ahead.
#1 – Their Debt Can Become Your Burden
When your child turns 18, things like credit cards and bank accounts become tangible commodities rather than ideas. Young adults like the concept of buying now and paying later, regardless of the implications—who doesn’t? But studies show that more people between the ages of 20 and 24 declare bankruptcy than graduate college—and that’s a scary thought.
No one wants to see their child sink themselves into debt, especially so early in life. That’s why many parents start college savings funds or take out loans to pay for college, housing, and other expenses to help their children get on their feet. Some parents add their child as an authorized user to their credit card so they can start building up a credit history without risk.
These are all noble things to do as parents and done thoughtfully they can go a long way towards setting a young person up for success. But it is crucial that steps be taken to avoid digging a hole, either for their start to adult life, your retirement, or worse—both. Education and expectations are critical. Make sure that your child knows how credit works, what it means to pay interest, and the power of prudent planning to keep debt in check and build wealth.
#2 – They Move Back Home
Many parents dread the empty nest syndrome. It’s a lonely feeling, and you always worry about your child’s wellbeing. Many young people need help getting started in life, especially if they don’t land a well-paying job right out of college.
The Pew Research Center found that 29 percent of parents said that the economy forced their adult children to move back home. Right now, millennials are the most likely generation to live in multi-generational homes. It’s become such a common occurrence that the stigma of grown children still living at home is nearly nonexistent.
Regardless of the reason why children are still living at home, the fact remains that most parents don’t plan for supporting them into adulthood. This can affect how much you can save and curtails planning options like downsizing to save money.
It is a slippery slope, and temporary assistance can morph into habits that last for years. If you do let your grown children move back home, ask them to contribute to cover expenses. Calculate what their share of expenses will be and set terms and conditions for letting them live with you. Not only will this aid you in your retirement planning, but it will begin to instill the sense of responsibility and even frugality that will become assets to your child when they do venture out on their own.
#3 – You Pay for Their Children
It’s completely natural—you love your grandkids and want to spoil them as much and as often as possible. It is a wonderful part of being a grandparent. But it can become a problem if you over-extend. It’s not uncommon for grandparents to foot the bill for dance lessons, private school tuition, sports, toys, and other costs.
It’s one thing to buy your granddaughter a science kit for her birthday, but it’s an entirely different story if you fund thousands of dollars for tutors, space camp, and travel to NASA facilities at the expense of your retirement plan.
Ideally, you should set a budget for how much to spend on your grandkids for birthdays, holidays, and miscellaneous costs.
Unfortunately, there are times when you may need to assume the role of full-time caregiver. Research shows that about three million grandparents are raising their grandkids. A dire situation like this has a massive effect on retirement planning. Don’t let it catch you completely unaware. Watch your finances closely, monitor any potential needs on the horizon that you may be compelled to step in and meet, and factor all of it into your retirement planning as worst-case scenarios.
#4 – You Treat Your Children Evenly
Children keep score with each other starting at a very young age. It’s normal for them to expect, and in many instances demand, equal treatment from their parents. If you bought one child a car when they graduated from college, you could imagine that the other will expect one, too.
To combat the “who’s the favorite?” debate, it’s essential to set boundaries and realistic expectations with your children. Be honest. Let them know that your financial support isn’t a direct measure of your love for them, that it depends on many other circumstances, including your financial situation. Remind them that you treat them fairly, but that doesn’t always mean equally.
For example, one child may have a six-figure salary while the other could be struggling with a minimum wage job. You might offer a little assistance to the latter child because they need it—not because you love them more. A dollar-for-dollar mindset isn’t fair, to you or your children.
#5 – Debt Can Become Too Normal
As your children get older, you see more significant expenses. When they turn 16, you might buy them a car. Just a couple years later, they’re off to college and need tuition, housing, and basic items they’re used to getting at home.
Many parents take on college tuition, car payments, and other big expenses to give their children the best start in adulthood. And as that becomes normal, it becomes comfortable, too.
It can become easy to get too comfortable with debt and start digging a deeper hole. This is extremely risky—even though your children are using the loan money, it’s still your debt to repay, and there’s no proper way to hold them responsible for the payment.
Advisors will commonly tell you not to go into debt for your children, especially when it comes to college. Instead, many will recommend looking at student loans as an investment, weighing risk and return, and taking on no more than is prudent given your overall financial situation.
As a parent, a potential return on investment is the fact that your child may be able to get a well-paying job, and if that’s the case, be able to pay you back for the loan in a timely fashion. But that’s not a guarantee, so if you plan on chipping in for college, the earlier you start planning, the better. A 529 plan, when funded strategically, can allow both you and your child to remain debt-free.
#6 – Teach Them Financial Independence
One of your most significant responsibilities as a parent is teaching your children good financial habits that will last them a lifetime. They might not be financially independent as soon as they leave home, but they should be able to learn pretty quickly and avoid severe financial distress if you’ve invested in their financial IQ.
Teach them about saving money at an early age by helping them set up bank accounts and manage their money.
Also, as they go through high school, start talking about different careers and the earning potential that comes along with them. Help them differentiate between careers that will allow them to live comfortably versus those that would have them living paycheck to paycheck. Some young adults want to follow their passion, even if it doesn’t pay well, and that is admirable. But they need to understand what it’s like to live as an independent adult and how to establish the life they want within their means.
When they move out, work with them to create budgets and help them stick to them. Let them know you’re available to answer financial questions or where to turn for help and education.
They’ll be on their way to financial independence faster with your teachings and guidance.
How to Childproof Your Retirement
There’s no doubt you love your children and may even be willing to sacrifice your retirement to give them a good life. But ideally, you won’t have to, especially if you can work with your children early to help them become financially independent.
Money and emotions don’t mix well. It’s important to set boundaries with your children so you can enjoy the life you want without worrying about their financial wellbeing. Share your retirement goals and show them how you’re saving. It might just inspire them to do the same.
Perhaps you’re already saving for retirement, or maybe you’re not sure where to start to maximize your return. Wherever you are in the process, Brighton Jones can help you find the best path to financial freedom. Connect with a financial planner today to talk about your retirement goals.
Matt Mormino, CFP® serves as an advisor at Brighton Jones.
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