Everyone knows parents sacrifice a lot for their kids: time, privacy, hobbies and interests, nights out on the town. It's understood that things change when you become a parent, that you have to give up certain things in order to raise a family. One thing most parents don't realize they'll be giving up, though? Cash. And lots of it. A recent study by Merrill Lynch proves just that.
Parents are spending way more on kids than ever before. The cost of raising a child from birth to age 18 is now expected to top out at around $230,000. While most new parents have an idea that adding a child to the family is going to increase expenses, most are not prepared for the financial stress they experience after Baby is born. From unpaid maternity leave making a dent in income, to all the extras no one expects like the sheer number of diapers and wipes you go through in the early days, 90 percent of parents say they were not expecting to spend as much as they did after becoming parents and nearly two-thirds say they've experienced financial difficulties associated with parenting.
And it doesn't stop after once the kids are out of diapers.
"Everyone told me that the diapers would be the expensive part," says Connecticut mom Rebecca Hastings. "I wish I could go back to paying for diapers!" It wasn't until her baby wasn't a baby anymore that Hastings really started to wonder where the money was going. "I didn't expect the sports fees and equipment, the school expenses like field trips to New York and book fairs and teacher gifts, the fact that little shoes cost a little bit and bigger shoes cost a lot more." But, like most parents, Hastings wouldn't trade it. "You make it work. It's what parents do. But I wish I had known that diapers and college savings are only part of the picture."
The unspoken debt of parenthood
Pennsylvania writer Lauren Wellbank was faced with that dilemma when her daughter was born. Wellbank had every intention of returning to her job as an account manager at a mortgage insurance company after the birth of her daughter, but circumstances intervened and she became a stay at home mom. "I knew I could start earning some money eventually, I just needed to bridge the gap until then," explains Wellbank. To make ends meet until she established a work-from-home income, she cashed out her 401(k). Her story is not unusual.
Turns out that around 72 percent of parents put their children's needs ahead of their own need to save for retirement and 25 percent would take on debt or use money already earmarked for retirement. Even though more people than ever are considering their financial situation before having a baby, 73 percent today, up from around 30 percent in the 1980s, parents are still frequently in the lurch and left scrambling when they hit retirement age.
How can they be sure to set enough aside for themselves and their retirement livelihood and meet their children's needs without risking their own financial security?
Talk to a professional.
Step one: Find a financial advisor who can help sift through your finances and determine what you'll need come retirement time.
Once you have a clear picture of your retirement needs, it's time to set some goals...and some boundaries.
401(k) To Save The Day
Stephanie Genkin, a fee-only Certified Financial Planner and founder of My Financial Planner, LLC, in Brooklyn, New York, recommends that parents fully utilize their employer-sponsored retirement account. "One of the ways parents can focus on saving for retirement is to contribute to a retirement account at work—or increase their contribution to a 401k/403b tax-advantaged retirement account—if their employer offers a plan." Contributions are taken automatically from every paycheck before taxes are taken out. "That takes away the need for parents to struggle with how to use their monthly income and reduces current taxes. In time, they will adjust to the amount that hits their bank account while saving for retirement first."
If your employer doesn't offer this benefit or you are a stay at home parent, consider contributing to an IRA or Roth IRA instead—a Roth IRA has an income cap and is taxed upon contribution, so what you see in your account is what you get when you withdraw the money come retirement. Even if you do have a 401(k), you could still contribute to an IRA since contributions can lower your taxable income each year.
Automatic Makes It Easy
Automatic increases to your 401(k) annually are another way to increase savings. "They can also use auto increase to set a one percent annual increase to their contribution until they max out," suggests Genkin. "Set it and forget it can really help parents save for retirement first."
Setting up automatic transfers from checking accounts to savings accounts is another under the radar way to establish an emergency fund. Weekly or monthly transfers of amounts even as small as $50 accumulate quickly and provide a safety net for unexpected expenses.
With the tendency of parents to put their children's needs ahead of their own, Genkin suggests setting appropriate limits on money earmarked for kids. "Another thing parents can do is create a spending plan for their kid's needs and check to make sure it's realistic by auditing the list to ensure you are maximizing your hard-earned dollars." Checking your spending beforehand can really help curtail budgetary excesses. "Set a limit on things like birthday presents for friends, toys, sporting gear, and non-essential clothing—areas that can really get out of hand." Genkin encourages parents to take the long view and consider how extraneous spending impacts today their future. "Make sure you have enough left in your household budget to save an equal amount for retirement."
Homeownership is still a great way to establish a viable financial future. "Parents who own a home and find it difficult saving for themselves first may want to consider making additional payments to their mortgage. This may sound counter-intuitive," Genkin explains, "but building equity in a home can create a de facto nest egg for retirement." Once the kids have grown and flown, parents can downsize and use their equity to support their retirement expenses.