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The Economics of Family
My wife and I received a phone call last night from friends who had just returned from England after spending ten days. The first thing we both thought of, almost instantly, was the ability to take off in October. October, for those that are unaware, happens to be a month that falls in a school year. The only way someone like us could arrange such a trip was to either vacation separately from your kids or to not have them at all. Dan and Sue, for reasons we have never asked about, are childless.
This means, at least in the handbook we have, that they are rich. Rich in the sense of money available. The experience of raising children is enriching without a doubt, but the costs of indulging in the act of procreation has become a hidden drain on your purse strings. Hidden until you find out what you may have been missing.
There is an economics behind bringing children into this world few of us consider when we decide to marry (or not) and follow through on the building of a family. For a number of years, the United States Department of Agriculture has followed these costs, detailing average expenditures for their categorized income groups. Lower income groups for the sake of their study average $24,400 a year, middle income wage earners averaged $52,100 and upper income groups averaged $98,600.
Children are a serious economic burden that goes unrealized by many folks as they struggle with making ends meet.
The middle income group will spend $170, 460 on a child based on the latest figures from 2001. Each year the USDA updates these numbers using the Consumer Price Index.
Now consider that these costs can seriously effect how and when you retire. Take any market movement out of the picture, and you will find that squirreling away any cash for your golden years can be compromised by kids. Not that I would ever trade anyone of ours in for a healthier, wealthier retirement, the time when most middle income folks start to save comes after the kids have come and mostly gone.
What this means is that your financial goals need some readjusting. As children leave the home, most folks tend to reallocate the money to rewards rather than to a financial plan that will aggressively get them at least part of the way to where they want to go. When I say rewards, I am suggesting that many empty nesters will tend to see the money they now have as a bonus for the vacation they have not taken, or the toys they were unable to purchase. This leaves many folks short of the money they need to live a long and monetarily comfortable life.
The biggest mistake comes with the underestimation. TIAA-CREF Institute conducted a survey of 2000 households and found that far too many pre-retirees see their spending habits decrease when they hit retirement. This group, which amounted to 57% of those surveyed will probably be in for a surprise when retirement does come their way. The same study found that in actuality, the percentage of household that found their post work years spending habits dropping was closer to 31%. Compare the households that made preretirement estimates of their spending as holding steady (36%) and the reality (47%).
This is based on preplanning that is both realistic and reasonable. The sad part is that most folks find themselves with not much more that $148,000 total equity, cash and home, as the value of their retirement.
If early retirement is your goal, stay away from kids. If retirement is your goal and you do have kids, the best method to achieve your goal is to be diligent when the cost of those kids start to diminish. Then the real spending begins... on your future.
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