The Impact of Raising Children on Retirement Security

Children are expensive; they require food, clothing, childcare, and an education. So, one might think that households with children would end up less well prepared for retirement than those without. But raising children is temporary, and the lifecycle model used by economists suggests two ways that parents might not endanger their retirement. One option is for parents to keep household consumption steady over time, but sharply curtail spending on themselves when they have children at home. The other is to have households plan for higher consumption while the children are at home and lower consumption when the children leave and then in retirement. Either way households would accumulate enough wealth to maintain their standard of living in retirement. But households may not behave optimally; they may increase household spending when they have children and maintain spending at that elevated level even after the children leave home. In this case, households with children may be less prepared for retirement than those without. This brief uses the National Retirement Risk Index(NRRI) to assess the impact of having children on the retirement security of today’s older working households. The NRRI is calculated by comparing households’ projected replacement rates – retirement income as a percentage of pre-retirement income – with target replacement rates that would allow them to maintain their standard of living. These calculations are based on the Federal Reserve’s Survey of Consumer Finances, a triennial survey of a nationally representative sample of U.S. households. As of 2013, the NRRI showed that, even if households worked to age 65 and annuitized all their financial assets (including the receipts from reverse mortgages on their homes), more than half of households were at risk of falling short in retirement. The discussion proceeds as follows. The first section briefly describes the nuts and bolts of the NRRI. The second section discusses the potential impact of children on income, wealth, and retirement preparedness. The third section uses regression analysis to explore the actual impacts. The final section concludes that, in terms of retirement preparedness, having children leads to a moderate increase in the likelihood of being at risk for households in their 50s. However, the influence of children is considerably smaller than other factors, such as having an employer retirement plan.