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Children Pose Moderate Risk to Parents’ Retirement Readiness

While having children leads to a moderate increase in the likelihood of being at risk of retirement preparedness, the influence of children is considerably smaller than other factors, says the Center for Retirement Research at Boston College (CRR).

A recent CRR issue brief, “The Impact of Raising Children on Retirement Security” uses the National Retirement Risk Index (NRRI) – which is calculated by comparing households’ projected retirement income replacement rates with target replacement rates – to assess the impact of having children on the retirement security of today’s older working households. Some of the findings and observations in the brief seem to be fairly obvious, but others appear to be counterintuitive.

Using data from the 2013 Survey of Consumer Finances (SCF), the brief shows that each child reduces household income by about 4% for households of parents in their 30s, but the percentage reduction declines to virtually zero for households of older parents and is not statistically significant. CRR suggests that this pattern is consistent with mothers of young children reducing their labor force participation for a time and then returning to work.

In terms of wealth, the brief explains that each child is associated with roughly 3%-4% less wealth, and given that more children means less wealth, one would expect that for parents in their 50s, having children would make them more likely to be at risk. Apparently that’s not the case, according to the regression results. The brief notes that by the time parents are in their 50s, each child increases the share of households at risk by only 2 percentage points. The authors explain that this finding means that the NRRI for households with two children should be 4 percentage points higher than for a household with no children.

Not surprisingly, having a retirement plan at work is very important, particularly a DB plan, which reduces the likelihood of being at risk by 40 percentage points, according to the findings. Having a DC plan reduces the likelihood of being at risk by 10 percentage points.

Interestingly, CRR found that being a two-earner couple has a substantial impact in the opposite direction, increasing the likelihood of being at risk by nearly 18 percentage points. CRR notes that this result may reflect, in part, lower Social Security replacement rates for two-earner couples, but the authors note that this topic may deserve further exploration.

In addition, saving for a child’s education reduces the likelihood of being at risk by 14 percentage points. The brief notes, however, that any such saving is earmarked for the children’s needs rather than for retirement, so it makes households look more prepared for retirement than they actually are.

The brief suggests that households spending less on themselves to cover child-rearing costs can remain on track for retirement. On the other hand, households that increase their total spending when they have children and maintain this higher level after the children are gone may be “headed for trouble in retirement, because they have not saved enough to maintain the standard of living to which they have grown accustomed.”