By Mallon FitzPatrick and Alicia Denton
May 30, 2023 – Less and less Americans are choosing to have children. The U.S. birth rate fell 13% from 2002 to 2019, according to a recent CDC national survey. One of the reasons more Americans are deciding not to have children is the substantial cost required to raise a child. The Brookings Institution estimated that middle-class families spend about $310,000 on a child from infancy to age 17. However, this is an estimate and variability in demographics, circumstances, and personal preferences may cause a significant deviation from the average. It’s important to understand the costs of raising a child because it may influence where a family lives, career choices, retirement, and discretionary spending.
For aspiring parents and for those with young children, developing a spending plan can be tricky. Organizing costs into broad categories is helpful, consider these: basic living expenses, housing expenses, childcare, healthcare, K-12 education, higher education, and discretionary spending. Basic living expenses include food and clothing. Reviewing a few months of credit card and bank statements is a good way to determine expenditures in this category. Aspiring parents may multiply these costs by a factor for each expected child to provide a reasonable estimate for projected expenses. Don’t forget to add allowances for the children’s furniture, strollers and car seats, these costs add up!
Housing expenses include rent, mortgage payments, HOA fees, home maintenance, insurance, and property taxes. Housing expenses might change if a larger space is needed to accommodate a growing family. Review all options, there are many. Consider renting before buying to assess preferred space requirements as the family grows. Some people need more personal space than others. Renting for a few years to help accumulate enough savings to buy that perfect home may be a financially and psychologically beneficial strategy for the long term. For those who may have extended their finances too far it’s okay and happens as circumstances change. Downsizing, moving to a less affluent neighborhood or relocating to a less costly state may be prudent. Striking a balance between the children’s priorities, parental happiness, and financial circumstances is a delicate equation.
Another significant expense is childcare, and it may last for a few years or until the teenage years. Those who are fortunate enough to have family nearby can help generally save on childcare costs. Otherwise, a full-time babysitter in the U.S. averages $32,000 annually according to Care.com. This cost increases substantially in affluent areas. It’s not uncommon for nannies in New York City to earn six figure compensation. Living close to family members that can help with childcare may influence where parents decide to live.
Healthcare is typically provided by a parent’s employer but it’s common to have additional costs to meet deductibles and out-of-pocket expenses. Children can have unexpected health conditions and it’s best to ‘prepare for the worst’. Childbirth alone costs $18,900 on average. A good health insurance plan will cover most of these costs. However, the average out-of-pocket cost for childbirth is $2,900 and increases for complicated pregnancies. We may recommend contributing to a Health Savings Account (HSA) if one is available through the parent’s employer. The contributions are made on a pre-tax basis and withdrawals avoid taxation if the funds are used for qualified expenses. Funds in an HSA may be invested and grow free of taxation. HSAs can be used for future healthcare costs or to reimburse the owner for past medical expenses.
Kindergarten through 12th grade (K-12) education is important. Parents want the best education for their children and not all public schools meet their criteria. K-12 private school tuition ranges from $10,000 to $70,000 a year and may be more costly than college. Parents can sometimes find public schools that meet their standards. However, these public schools may be in areas where taxes and home prices are substantially higher than average. Moving to affluent areas may be as costly as sending a child to private school in the long run. We recommend a thorough review of living costs and school options and an evaluation of the pros and cons.
Parents have a set of preferences for their children as well as goals for themselves. There are priorities and trade-offs to consider. Are parents willing to delay retirement to afford their child a certain lifestyle and level of education today? Is private school worth the cost? Should parents prioritize their own retirement savings over funding their child’s education? What’s the best way to balance all these priorities and effectively use the savings tools (529s, HSAs, Crummey Trusts) available? How should assets be allocated to help achieve a family’s objectives?
Our job as wealth managers is to understand the parent’s preferences, objectives, and financial circumstances – then develop a plan to increase the likelihood of experiencing good outcomes. It’s important to regularly review and adjust the plan as children grow and circumstances change. Starting a family can be daunting, but planning will help alleviate concerns about the future.
Sources:
https://www.cdc.gov/nchs/data/nvsr/nvsr72/nvsr72-01.pdf
https://www.cnbc.com/2022/07/20/birth-rate-financial-hesitancy.html
https://www.wsj.com/articles/it-now-costs-300-000-to-raise-a-child-11660864334?mod=hp_lead_pos5
https://www.businessinsider.com/how-much-costs-raise-kid-us-americans-have-fewer-kids-2022-8
https://www.phillyvoice.com/how-much-does-it-cost-raise-child-pennsylvania/
https://www.move.org/child-care-cost/
https://www.forbes.com/advisor/health-insurance/average-childbirth-cost/#:~:text=Average%20Cost%20of%20Childbirth%20in,cover%20most%20of%20that%20cost.
https://www.care.com/c/how-much-does-a-nanny-cost/
United States Department of Agriculture (USDA) Report, 2020
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