Children are a blessing, but they have a negative effect on retirement preparedness. An analysis conducted by the Center for Retirement Research (CRR) at Boston College found that each child increases the share of households with parents in their 50s who are at risk of not being able to fund retirement by two percentage points. Two children, therefore, increase the risk by four percentage points.

The assessment was done using the National Retirement Risk Index (NRRI). The NRRI compares a household’s projected retirement income as a percentage of pre-retirement income with a target replacement rate. The target replacement rate is the level of income a couple would need to maintain the same standard of living. A household is considered to be at risk if their projected retirement income is more than 10 percentage points below target.

The increased risk is due to income and consumption patterns. Women with children have lower labor force participation rates and, when they do work, earn lower wages. At the same time, consumption is higher: The cost for a family of four is 40% greater than the cost for two adults. An ideal consumption pattern would compensate for this by either saving at a constant rate relative to income or by having the parents reduce consumption spending once the children leave the house. In reality, many households do not cut back on consumption. These same households also tend not to increase their contributions to 401(k) plans, which is the primary way Americans save for retirement.

Saving for education likely also has an impact, though the data is less clear. Educational savings reduce the risk of retirement shortfall by 14 percentage points because it is included in the determination of a household’s wealth. To the extent that such savings are earmarked for college, retirement readiness is weaker than it would first appear.

Children are not the only factor influencing retirement, nor the biggest. The CRR estimates that having a workplace retirement plan, particularly a pension, reduces the chance of being at risk of not funding retirement by approximately 40 percentage points. Being a two-earner couple also has a significant impact, though the CRR acknowledges that the actual impact needs further analysis.

Source: “The Impact of Raising Children on Retirement Security;” By Alicia Munnell, Wenliang Hou and Geoffrey Sanzenbacher; Center for Retirement Research at Boston College, September 2017.

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