Raising children has never been inexpensive. But the costs go well beyond daycare and college today, extending far into young adulthood—and that could pose a problem for parents’ retirement plans.
Parents spend $500 billion annually on their adult children—about double what they put into their retirement accounts, according to a study released on Tuesday by Bank of America Merrill Lynch and aging consultancy Age Wave. Nearly 80% of U.S. parents give some financial support to their early-adult children, from helping them with groceries to shelling out substantial sums for weddings, first homes, or even granchildren’s college educations.
“We sense that this cost is increasing because the life stage of early adulthood has elongated,” Ken Dychtwald, head of Age Wave, said in an email. “Adult children take longer to leave home, get established personally and in their careers, and establish financial independence in part because many are saddled with student loan debt.”
Often, the price tag associated with children is the base cost of raising them to 18—about $234,000 in the United States. That estimate doesn’t account for the less visible costs. Only a quarter of households with children use paid childcare. For the other three-quarters, caregiving is typically done by a family member—often a woman.
About 54% of women surveyed took a leave from work when they first became a parent, compared with 42% of men, according to the Merrill Lynch/Age Wave study. Women were also more likely to switch to a job with more flexibility or work from home after the birth of a first child. Men were almost twice as likely to switch to a job that paid more, or take on more hours for greater pay. These dynamics often contribute to the so-called gender gap in pay, which feeds into the gender retirement gap, leaving women with less in savings than men for what often is a longer life.
When it comes to retirement savings, the conventional wisdom has often been that parents will ratchet up their savings in the final sprint to retirement, once they are empty-nesters, to make up for the leaner years when kids took up much of the budget. But the study finds that the priciest phase of parenting is when the children become adults. Other research has supported that finding, with a 2015 paper by the Center for Retirement Research showing less than a percentage-point boost in 401(k) contributions when kids leave home.
It is a difficult situation with few easy fixes. One tip from the study: Parents should continue to contribute to health-savings accounts, 401(k)s and IRAs—even when they take time out of the workforce.
The good news is that with retirement, at age 62, comes a new income source in the HECM mortgage where home equity shells out considerable cash to eliminate forward mortgage payments and sometimes provides a nice cash contribution to back up the meager savings parents are left with after the family uses up a big part of the retirement savings.
“So, hmmmmm, call me,” says Warren Strycker veteran financial professional, “Let’s talk. Who knows, I might have answer for you” (See contract information under the “information” tab on the home page here.
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