Retirement planning in the US primarily focuses on providing living expenses for retirees.
What happens when you throw a baby?
Americans are having children later in life, which means they are more likely to retire before their children reach adulthood. According to KFF, more than 4 million school-age children live in households with someone older.
“I think this is a topic that will come up more and more,” said Patrick Huey, a certified financial planner in Naples, Florida.
You won’t find much literature online about retiring with children. But retirement planners say it’s a topic worth exploring, because your retirement could look very different when planning includes school-age children.
There are at least two different categories of retirees with dependent children.
One group includes parents who retire at a relatively young age, perhaps because of a military job or a financial windfall. Another group of parents have children later in life, so their normal retirement date comes before the children are older.
Retiring with kids still in school can be expensive
Either way, retiring with school-age children can be financially dangerous. Getting it right can take years of planning.
Laurie Allen, a certified financial planner in Hermosa Beach, California, has a 2-year-old son. She is 43 years old. Before the baby arrived, she had planned to do “alternative work” for a while after she turned 55. Now, she’s not so sure.
Thinking about retirement with a child in school “really scared me in a way I didn’t expect,” Allen said.
Kelly Renner, a certified financial planner in Augusta, Georgia, works with couples who hold federal government jobs at nearby Fort Gordon. They are often retired with school-going children. And this requires preparation.
“People I’m talking to, who started planning when they were 20, are on track to retire at 40, and if they have kids, that’s part of their plan,” she said.
Renner’s elite clients have fully funded 529 college savings plans to cover their children’s higher education expenses. They contribute the maximum to a thrift savings plan, the government’s version of a 401(k). They often have income from rental properties.
All this is to prepare them for a retirement that could last 40 or 50 years, including their children’s college years.
“It doesn’t matter how young the kids are,” Renner said. “This is how much it will cost them.”
If you think you might retire before your children are adults, here are five questions to ask now.
How will you pay for college?
According to the Education Data Initiative, the cost of a four-year higher education averages more than $150,000.
Most families pay for college through a combination of loans, income, and savings. If you’re retired, you likely have a fixed income, and your savings are probably earmarked for retirement. And if you borrow money now, who will pay it back?
“The warning flag for me is when people come to me and say, ‘I want to do this. I don’t have any 529 savings, but I have retirement,'” Huey said.
A college savings plan is important to help retirees cover their children’s higher education costs, he said.
But there are other ways to cover college costs. One is to take your kids to community college. Two-year colleges typically cost only a few thousand dollars per semester, and they can get a kid halfway to a bachelor’s degree.
How will you pay for health insurance?
Many retirees plan to leave the workforce around age 65, so their workplace benefits end when Medicare begins.
But the federal health insurance program generally doesn’t cover children.
If you retire with school-aged children, financial advisors say, you’ll probably need to buy health insurance for them.
According to a Forbes analysis, private health insurance for a child costs between $300 and $400 per month. Low-income families may be eligible for the federal Children’s Health Insurance Program, which is administered by the states.
“Health insurance can be a huge hurdle,” said Joseph Piszczor, a certified financial planner in Washington, Pennsylvania.
When will you claim Social Security?
Having a school-age child in retirement may change the math when you choose to collect Social Security.
Retirees can claim Social Security as early as age 62. The monthly benefit check increases with each year you wait, peaking at age 70.
Financial planners generally urge retirees to avoid accumulating retirement benefits in order to avoid taking advantage of larger checks later.
But consider this little-known fact: Your child may also be eligible for Social Security.
According to AARP, about 4 million children receive Social Security benefits because their parents are retired or deceased or disabled.
A child can generally receive half of a parent’s Social Security benefits. Additional benefits usually end at age 18.
Will you spend your retirement savings on your children?
Ideally, your retirement savings account is meant to support you, the retiree, not your dependent children.
But if you’re retired and have kids in school, it may be difficult to avoid tapping into those savings.
If you retire before age 59½, withdrawing money from a tax-favored retirement account is typically subject to taxes and penalties.
“If you’re retiring at age 55 or 50, you have to think, ‘Where am I getting my income from?'” said Crystal Cox, a certified financial planner in Madison, Wisconsin.
After age 59 ½, the penalty ends, but the money is still needed for your retirement.
Florida CFP Huey believes spending retirement savings on children is a mistake. Raid your IRA for education costs or travel baseball fees, and you’ll risk depleting your savings later.
“The greatest gift you can give your children is not to move forward with them,” he said.
Have you consulted a financial planner?
Retirement planning is difficult enough without dependents. Experts say if you hope to retire with school-aged children, it’s wise to meet with a financial advisor and draw up a plan.
“This is a completely different plan than a typical retirement plan,” Piszczor said.
Reporting by Daniel De Vis, USA TODAY/USA TODAY Network via Reuters Connect