By the time we retire, our children have usually long left the nest - or so it used to be. As more and more of us choose to start a family later in life, our children may still be very much reliant on our financial support well into our retirement years. And then there are those lucky few who can afford to retire at an earlier age, making it more likely to have child-related expenses after retirement.
Having kids comes with a long list of expenses. However, if we divide child-related expenses into a few main categories, they become a bit easier to manage.
Let's start with general, ongoing expenses, excluding major items like college and healthcare. Many of these ongoing expenses are hard to plan for, since they come and go, vary over the course of the year or from one year to the next. Perhaps the only realistic approach to modeling ongoing expenses is by including a reasonable allowance for them in your retirement plan.
Your retirement calculator should allow you to enter this allowance in current prices and then increase it forward with general price inflation and child age inflation. Child age inflation accounts for your rising child-related expenses as your kids grow older. It reflects how the cost of food, entertainment, activities, and transportation rises as your kids grow and become more independent. A decent retirement calculator should allow you to set your own child age inflation to reflect your unique situation.
College is one child-related expense that has always been intertwined with retirement planning. Even if you can afford to save for your kids' college separately from saving for retirement, it may still affect how much you can afford to save towards retirement.
Those of us who are unable to make separate savings simply delay retirement until our kids are out of college. That way we can pay for college from our employment income. However, there is no reason why you can't retire while having children in college, if you planned for it.
College expenses are best modeled separately from the rest of your child-related expenses, using the "special events" feature of a retirement calculator.
— Let's say your child's date of birth is 5/4/2010.
— Expected annual cost of college, in today's prices is $20,000
— Let's assume conservatively that you pay this entire sum, increased with inflation, at the start of each school year.
— Most likely year your child will start college: 2028 (The year she turns 18)
— Most likely year your child will start her senior year: 2031
This can be modeled with an annual event that costs $20,000 per year, increased with 2% inflation, starting in 2028 and ending in 2031.
Tip: Since college tuition inflation is so hard to predict, it is always a good idea to update your retirement plan regularly with the most recent annual college costs. This way, you can make incremental adjustments to your plan along the way.
It is important that your calculator allows you to enter special events in current prices and specify an inflation rate for each event. It is too easy to make mistakes trying to project future costs on our own. It is a task best left to our retirement calculator to do for us.
The special events feature can also be used to model saving towards your kids' college in advance. In our example above, you may choose to set up a monthly event where you add $800 to your children's college fund each month, starting from next month until August 2028.
Much like college expenses, these are also best modeled using the special events feature of a retirement calculator. These include any major events in your child's life, such as their wedding, that you would like to help with.
We believe that healthcare expenses in general should be modeled separately, due to their unique growth pattern and relationship to age. There is an enormous amount of data and research available to help forecast healthcare costs, as this is of critical importance to insurance companies, large employers, and government policymakers. A retirement calculator should be able to develop a reasonable predictive model based on this data and research.
This is true for your children's healthcare costs as well as for your own.
There is one possible complication with regard to timing that you may need to watch out for.
— You specified in your retirement calculator that you will be supporting your daughter until August 2028 (when she goes to college).
— You also set up a special event from 2028 to 2031 to reflect college expenses.
— You plan to keep your daughter on your own health insurance until she turns 25 in 2035.
A calculator that models healthcare expenses automatically will likely assume that your child's healthcare expenses end when she moves out in September 2028. Since you plan to cover her healthcare costs until she turns 25, you need to set up a separate special event for these costs from September 2028 to April 2035 (the month before she turns 25).
The fear of not being able to support a child is among the key reasons so many couples delay having children. But with some rational forecasting and analysis, you can get some peace of mind and put at least some of these worries to rest.
We believe that a retirement calculator should be able to model the financial aspects of future children. After all, your decision on when to have children will have an enormous effect on when you can afford to retire. This is especially true if you plan to use your retirement calculator as a holistic lifelong financial planning tool.
Wait, were we not just talking about children? Yes, but in financial terms, it doesn't matter how old is the person who is financially dependent on you. A retirement calculator should allow you to model dependents regardless of age.
Unfortunately, this is something most people neglect in their retirement plan. It can be hard to predict how much an elderly parent will be dependent on you financially, and for how long. Also, if your parent is covered by Medicare and receives a Social Security check, their financial burden on you may be minimal.
However, everyone's situation is different. If there is a reasonable chance that someone other than your children may depend on you financially, you can reflect their expenses in your retirement plan using the same methods we discussed above.
Careful modeling of our child-related expenses can be a critical part of retirement planning. This is especially true if you are using your retirement calculator for holistic, lifelong financial planning. But it can also be a key component if you need to keep supporting your kids after you retire.
In either case, a retirement calculator needs to allow you to enter your ongoing child-related expenses and automatically project them forward with both price and age inflation and should allow you to update it regularly. Your calculator should allow you to specify until what age you plan to support your children.
It should have a reasonable built-in forecasting model for your child's medical costs since these costs are inherently difficult to project.
A calculator should also permit you to model special events for major expenses such as college and allow you to specify a realistic inflation rate for each event.