Retirement planning in America is largely focused on providing for the living expenses of retirees.
What happens when you throw in a child?
Americans are having children later in life, which means they are potentially more likely to retire before their kids have reached adulthood. More than 4 million school-age children live in households with a senior, according to KFF.
“I think it’s a topic that’s going to 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 kids. But it’s a topic worth exploring, retirement planners say, because your retirement might look very different when the plan includes school-age children.
There are at least two distinct categories of retirees with dependent children.
One group comprises parents who retire relatively young, perhaps because of a military job or financial windfall. Another group of parents have kids later in life, so their normal retirement date arrives before the kids have grown up.
Retiring With Kids Still in School Can Be Costly
Either way, retiring with school-age children can be financially perilous. Doing it right can take years of planning.
Laurie Allen, a certified financial planner in Hermosa Beach, California, has a 2-year-old child. She’s 43. Before the baby arrived, she had planned to go “work-optional” sometime after age 55. Now, she’s not so sure.
Contemplating retirement with a kid in school “really, really scared me in a way that I hadn’t expected,” Allen said.
Kelly Renner, a certified financial planner in Augusta, Georgia, works with couples in federal government jobs at nearby Fort Gordon. They often retire with school-age kids. And that requires preparation.
“The people I’m talking to, they started planning in their 20s, they’re on track to retire in their 40s, and if they had kids, that’s part of their plan,” she said.
Renner’s typical clients have fully funded 529 college savings plans to cover their children’s higher education expenses. They max out contributions to Thrift Savings Plans, the government version of a 401(k). They often have income from rental properties.
All of that 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 small the kids are,” Renner said. “It’s how much they’re going to cost.”
If you think you might retire before your children reach adulthood, here are five questions to ask now.
How Will You Pay for College?
Four years of higher education costs more than $150,000 on average, according to the Education Data Initiative.
Most families pay for college through some combination of loans, income and savings. If you’re retired, you’re likely to be on a fixed income, and your savings is probably earmarked for retirement. And if you borrow money now, who’s going to 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 my retirement,’” Huey said.
A college savings plan is crucial in helping retirees cover higher education costs for their kids, he said.
But there are other ways to cover college costs. One is to steer your kids into 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 kicks in.
But the federal health insurance program doesn’t generally cover children.
If you retire with school-age children, financial advisers say, you will probably have to purchase health insurance for them.
Private health insurance for a child costs between $300 and $400 a month, according to an analysis by Forbes. Lower-income households may be eligible for the federal Children’s Health Insurance Program, which is managed by states.
“Health insurance can be a major 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 on when you choose to collect Social Security.
Retirees may claim Social Security as early as age 62. The monthly benefit checks rise with every year you wait, maxing out at age 70.
Financial planners generally urge retirees to hold off in collecting the retirement benefit, to leverage larger checks later on.
But consider this little-known fact: Your kid may also be eligible for Social Security.
Nearly 4 million children receive Social Security benefits because their parents are retired or deceased or have disabilities, according to AARP.
A child can generally receive up to half of a parent’s Social Security benefits. The extra benefits typically end at age 18.
Will You Spend Retirement Savings on Your Kids?
Ideally, your retirement savings account is meant to support you, the retiree, and not your dependent child.
But if you are retired and have kids in school, it might be hard to avoid tapping those savings.
If you retire before age 59 ½, withdrawing money from a tax-favored retirement account usually triggers taxes and penalties.
“If you’re retiring at 55 or 50, then you have to think about, ‘Where am I getting my income from?’” said Crystal Cox, a certified financial planner in Madison, Wisconsin.
After 59 ½, the penalties go away, but the money is still supposed to fund your retirement.
Huey, the Florida CFP, thinks it’s a mistake to spend retirement savings on children. Raid your IRA for education costs or travel baseball fees, and you risk running out of savings later on.
“The greatest gift you can give your kids is not moving in with them,” he said.
Have You Consulted a Financial Planner?
Retirement planning is tricky enough without dependents. If you expect to retire with school-age children, experts say, it’s wise to meet with a financial adviser and work out a plan.
“It’s a totally different plan than a normal retirement plan,” Piszczor said.
Reporting by Daniel de Visé, USA TODAY / USA TODAY Network via Reuters Connect
