For some, nothing is more vital to the human experience than having children. These people see it as almost a sacred duty – to give their parents grandchildren, to propagate the species, to savor the indescribable joy of parenting.
Then there are the rest of us, a small minority to be sure, who think that diaper-changing and infantile screaming are respectively the most unpleasant task and sound imaginable. From that point of view, every dollar spent raising offspring would be better spent elsewhere. For those entrenched in the latter category, or younger ones thinking of joining their ranks, some of the standard rules about retirement planning need not apply.
The United States Department of Agriculture has estimated that it costs $233,610 to raise a child born in 2015 – the most recent report – to the age of 18 ($284,570 if projected inflation costs are factored in). While that figure is more the result of an exercise in governmental public relations than a scientific attempt to calculate the exact cost of child-rearing, it’s still large enough to reinforce the belief of the voluntarily childless that they made the right decision. And those are the expenditures for just one kid.
Granted, you can use the same bassinet and toys for multiple children, but should you plan to reproduce the 2.3 times necessary to stave off population decline, it seems as though the average person might as well regard affluence as mathematically incompatible with raising a family. (Also, that $233,610 number excludes college.)
So, what could you do with the extra nearly $13,000 a year that might otherwise have gone to everything from mittens to Pablum to violin lessons?
For DINKs – if you need an acronym refresher, that’s Double Income, No Kids – retirement planning isn’t moderately easier than it is for parents. It’s exponentially easier. If the first commandment of retirement planning is “start early,” then “have as few dependents as possible” is 1A. As Bob Maloney of Squam Lakes Financial Advisors in Holderness, N.H., puts it: "For every dollar spent on children's education, retirement planning is hurt proportionately."
One popular financial rule of thumb says that actuarial trends, cost-of-living expenses and per capita income data can be distilled into a single convenient number – 4% – for retirement planning purposes. According to the 4% Rule, this is the percentage you ought to be able to withdraw from your retirement fund every year without fear of running out of money. It presumes you’re leaving the workforce at the traditional retirement age (65/66) and thus require a nest egg totaling 25 times your annual expenses.
If you’ve been socking away an extra $13,000 per annum throughout 18 years of your prime working life, the money that otherwise would have been spent on children, the conclusion is clear: If you want, you could either withdraw more than 4% and spend a little more extravagantly each year of your retirement, or – and this warrants a dramatic pause punctuated by dashes – retire earlier.
Drawing down 3% of a $1.5 million retirement account is the equivalent of drawing down 4% of a $1.125 million retirement account. Spend your working years amassing the $375,000 difference, and you could conceivably retire eight years earlier. Three percent, by the way, is more than just the number that happens to fit the equation. It’s recognized as the threshold under which, historically, you should never need to worry about withdrawing money unsustainably. Never has there been a 50-year period in which a 3% withdrawal rate would have resulted in a retiree completely running out of principal.
The 4% Rule might make for good theory, but is it valid in the real world? Bill Bengen, the certified financial planner who popularized the rule in the early 1990s, acknowledges that 4.5% or 5%, or even more, might be appropriate for investors positioned in securities with significantly higher volatility and thus potential higher rates of return. An alternative interpretation is that, if you want to remain invested in conservative securities, one possible way to raise your annual drawdown percentage is to start with a greater margin of error.
Grossly simplifying all the different variables, let’s assume that a childless worker can indeed save an additional $13,000 per year for 18 years. And let’s start at 25, a reasonable age at which to have one’s first child. With a 4.5% rate of return, compounded annually, the diligent childless person gets to enjoy an additional $393,536 that a parent doesn’t. Further assume that that money now remains invested at 4.5% with no further contributions through age 65, and that money grows to $1,036,438, a nice pot with which to begin the period of one’s life aptly referred to as the golden years. (For another take on the 4% rule in the current economy, see "Why the 4% Rule No Longer Works for Retirees.")
When a couple opts not to multiply, that couple has increased its capacity to grow its retirement fund. One fewer partner at home with the kids means one more partner in the workforce. Should both partners receive an employer match on 401(k) contributions, up to a maximum of 25% of each spouse’s salary and $17,500 annually, the road to retirement becomes considerably wider and smoother.
"A word of caution would probably be about their tax situation," says investment consultant Dominique J. Henderson, Sr., owner of DJH Capital Management, LLC in DeSoto, Texas. "A typical couple without kids will have a higher tax liability and would therefore would need to find more tax-efficient ways of investing." He also points out that less life insurance will likely be needed: "The surviving spouse would go back to work at some point and would still have no dependents to provide for, so this number is much less than the typical family."
For couples who’ve committed to selfishly putting their own interests ahead of those of hypothetical, nonexistent offspring, much of the same retirement advice intended for parents still applies. Defer Social Security payments until age 70 and be strategic about when and how to use spousal benefits. Don’t cash out your 401(k) early, as this would result in a 10% penalty. Should the opportunity arise, refinance your mortgage along the way at a more attractive rate. That should be relatively easy, given that you and your spouse presumably have a higher combined credit score, as a result of having a greater capability for making mortgage payments, thanks to two incomes and no kids.
Not everything is quantifiable, and parents would be the first to argue the point. The psychological rewards that go with seeing one’s child graduate from college, raise a family of his or her own or even just grow up without ever getting arrested are difficult to put a dollar figure on. But people who’ve looked at the costs and benefits of raising kids, and have decided that the former outweigh the latter, will find that forgoing those intangibles will place them on an easier path to retirement.