Tuesday, November 19, 2013

The $241,000 Kid (College Not Included)

I often wonder how the more than 95% of American workers who aren’t able to save enough for retirement will get by and what other strategies might be available to households who recognize that they probably won’t win the “Save 22 Times Your Required Income after Social Security Benefits 401(k)” Lotto1.

A few weeks back, I asked readers for their thoughts on the subject and I received some interesting comments.

A fellow financial planner, Mark Zoril, responded eloquently with what might be an obvious potential outcome, even if you don’t think of it as a strategy:
"I have been a financial advisor for 17 years and worked with many people that have very modest accumulations for retirement. However, what I have found is that over the years, their lifestyle, what they need to spend, has adapted to their limited income and modest means. They simply do not lead, in any way, extravagant lifestyles.
Mark identifies an outcome (a “strategy” in the game theory or evolution sense) that is important because it will be the most common scenario for families that can’t save enough: their standard of living will decline considerably after they retire.

Another strategy for funding retirement if you can't save enough is to limit your family size. This is not a strategy that I readily recommend, but then neither is the one that Mark notes.

I'm simply pointing out that having children may have a large impact on your ability to save enough for retirement. I also want to reinforce the thread that the decisions you make and your life experiences before you retire largely determine your standard of living after you retire.

I have three grown children and I can tell you two things about child-rearing: it’s expensive beyond belief and it’s rewarding beyond belief. 

How much does it cost to raise a kid? According to a 2013 U.S. Department of Agriculture report, it will cost an estimated $241,080 for a middle-income couple to raise a child born in 2012 for 18 years. That's up almost 3% from 2011.

But wait, there's more.

Despite this study's assumption, kids don’t leave home and support themselves at 18, anymore, like my wife and I did. Jobs are hard to find and a lot of kids "boomerang". Bump up that price tag a few more years.

Second — and this one is going to break your heart — the Dept. of Agriculture estimate of over $240,000 per child doesn’t include college costs. Add in an average $22,261 per year for a four-year public college and that $241,000 climbs to $330,000 per child.

(I’d personally feel blessed with these costs. One of mine is in med school and the others are taking the scenic route through college. Does any kid graduate in four years, anymore?)

If you’re interested in a cost more tailored to your specific household, the Dept. of Agriculture provides a “childcare cost calculator” with which you can further ponder the dollar cost of parenthood, but if you don’t have Internet access, you can achieve roughly the same experience by shaving your head with a cheese grater.

I had an economics professor in college who said that the ultimate form of birth control would be to show young couples the lifetime cost of raising a child.

(That’s how economists think. I’m pretty sure he had 2.3 children.)

So, the average cost of raising a single child far exceeds the typical retirement savings for 95% or more of American households. It's easier to fund retirement with a spare $330,000 or two lying around the house than it is with a couple of twenty-somethings lying around the house.

I’m not suggesting that you forego children to secure retirement, but you need to understand that there is a correlation. If you weren't able to save enough for your golden years but raised a happy, successful family of children and grandchildren, then pat yourself on the pack. Yours was the nobler accomplishment.

And every time someone writes me that they were able to save plenty of money for retirement and anyone who didn’t is one of those 47% slackers, I know the odds are quite good that the writer never had a family medical or other financial catastrophe.

And he probably doesn’t have children.

1If you can generate a 4.5% payout from your savings, through TIPs ladders, annuities, or stock and bonds portfolios, for example, you will need to save about 22 times (1 / .045) the amount of retirement income you will need less any income you will receive from Social Security benefits or pensions. For example, if you will need $40,000 a year to retire on and Social Security benefits will total $25,000, you will have a "gap" of $15,000. With a 4.5% payout, you will need to save about $333,000. If you will only be able to generate a 3.5% payout, you would need to save about $429,000.

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