Will a New Baby Derail Your Retirement Plans?
According to the USDA's recently released annual cost of raising a child survey, it cost about $13,000 a year to raise a child, and that doesn't include the cost of college. So how do you afford to raise a baby and still save for retirement?
Well, you have to figure out how to budget the necessary funds for the babies needs, while still adding to your 401(k). If you don't, you may find yourself in your 50s with a couple of college age kids and no money for your retirement. You really have to figure out how to balance both of these financial needs.
If you look closely at the USDA survey, you'll see that the largest expenses comes in the form of housing costs, child care and education expenses. Those three categories make up about half of the total costs. So if you can figure out how to reduce one or more of those categories, then adding a baby may not put that much pressure on your finances. That means you should still have money to add to your 401(k) each year.
- You can read the full survey here: USDA Annual Cost of Raising a Child Survey. The survey site also has a calculator you can use to estimate the costs of a new baby for your region of the country.
If you're going to have a baby and don't have the room for that new family member, then having the baby is going to significantly increase your monthly expenses because you'll need a larger home. And a larger home comes with larger expenses all the way around.
But if you already have a home that can accommodate one new family member (you have an extra room or the kids can bunk-up in the same room), the incremental housing costs won't be that much. You're already paying the current mortgage or rent, already heating and cooling the house and maintaining it. A new baby might come with some incremental housing costs, like new furniture, but overall, it might not be that much.
Child Care and Education. Child care and education expenses make up about 17% of the costs of raising a child each year. Interestingly, this statistic varies widely by family. Why? Because some families have little or no child care or education expenses. That's because one of the spouses stays home to take care of the kids (or other family members do it for free) and the kids go to public schools. So the average of 17% isn't very helpful. You're likely to have either very few expenses or a ton of expenses.
If you don't need child care and are going to use your local public school system, the child care and educational expenses can be significantly reduced. Now, you'll still need to buy school supplies and pay the occasional baby sitter, but those expenses will be much less than the average expenses in the survey.
If, however, you need child care and you want to send your child to private school, you can easily double or triple these expenses. In fact, these expenses could end up being the largest expenses you incur.
The USDA Survey covers other areas as well, such as food, clothing and health care. But in general, those expenses don't vary as much among families. A new baby needs to eat, needs clothes and needs health care. But the categories of housing, child care and education do offer opportunities for planning and lifestyle choices.
It's important to think about these financial issues when it comes to raising kids. It would be nice if you could afford everything you wanted, but the reality is that most people can't. So you have to make trade-offs. And there are many baby boomers today who are facing a less than rosey retirement future because they didn't think enough about balancing these needs. For all the right reasons, they spent a great deal of money to raise and educate their kids, but unfortunately forgot to take care of their own retirement needs.
Bottom line. A bundle of joy adds a bundle of expenses. Figure out how to balance the financial needs of your new baby with your legitimate need for financial security as you age.
Learn More: Want to learn about a simple way to manage your personal finances and prepare for retirement, investigate my new book Your Money Ratios: 8 Simple Tools For Financial Security, available in bookstores and at amazon.com The Wall Street Journal called the book "one of the best finance books to cross our desks this year." WSJ 12/19/09.
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