“There’s never a good time to have kids—you just have to go for it.”
If you’re contemplating starting a family, chances are you’ve heard this well-intentioned advice by now.
While it’s true that little is predictable when it comes to having children, there’s no denying it’s as much a financial decision as an emotional one.
After all, the average lifetime cost of raising a child exceeds $245,000, according to the U.S. Department of Agriculture.
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That’s a price tag that might leave you wondering: Does it make sense to have a baby in your twenties, so you can tackle child-related costs early—or when you’re in your thirties and, hopefully, more financially stable?
Of course, there’s no blanket answer.
But to help make some educated guesses, we took two hypothetical sets of wannabe parents a decade apart in age and tried to compare how their respective finances would be impacted in four major money areas—taxes, retirement, college costs and child care—by bringing home baby.
Meet the Parents-to-Be ...
The younger couple, Emma and Tyler, are both 26—the average age at which women have their first baby, according to the Centers for Disease Control and Prevention.
Emma is an executive assistant. Tyler is a junior accountant. Combined, they make $73,000, and are still chipping away at student loans and credit card balances they accrued in college.
Although they spend nearly every penny of their paychecks, they feel emotionally ready to have a child. They’d rather be young parents—and are confident they can make their budget work with a child.
Holly and Brendan, meanwhile, are both 36 and doing well financially. Their income has grown steadily over the past few years—which isn’t surprising since women’s pay peaks at 39 and men’s at 48, based on data from Payscale.
Between Holly’s job as a project manager and Brendan’s as a human-resources manager, they make $120,000 combined. They’re only a few months shy of paying off their student loans, carry little credit card debt and contribute a portion of each paycheck toward retirement.
They purposely put off having children until they reached six figures—and now feel financially ready for parenthood.
Although Holly considers herself healthy, she knows they may have to contend with in vitro fertilization costs—22% of women aged 35 to 39 deal with infertility. In case this happens, the couple has saved up $15,000—enough to cover a round of IVF, which averages $12,400.
So which couple would fare better, financially speaking, if they had a child? We asked financial pros to weigh in.
Let’s Look at Baby’s Impact on Taxes ...
When it comes to paying Uncle Sam, it’s not the couples’ ages that make the difference—it’s their income level, says Gail Rosen, a certified public accountant (CPA) and head of her own accounting firm in Martinsville, N.J.
While both parents can take dependent exemptions for their child, only Emma and Tyler’s income qualifies them to take the full child tax credit—up to $1,000 per child for married couples filing jointly.
Holly and Brendan make too much to take full advantage of the tax break.
The child tax credit starts to phase out at $110,000 for couples filing jointly, so “Holly and Brendan may only get a $500 tax credit,” Rosen says. They’ll also likely phase out of qualifying altogether in a few years as their income rises.
So Who Has the Advantage? Although Emma and Tyler make less, they have the advantage because “it’s all about the tax bracket,” Rosen says.
Since they fall into a lower tax bracket and can take full advantage of the child tax credit, they are potentially taking home a larger percentage of their paychecks than Holly and Brendan.
Let’s Look at Baby’s Impact on Retirement ...
When it comes to your nest egg savings, the real key is to start socking away money as early as possible.
To that point, having Junior at 26 is more likely to cut into prime saving years because younger couples tend to have tighter budgets and don’t contribute as much to retirement, says Rebecca Kennedy, a Certified Financial Planner™ (CFP®) and founder of Denver-based Kennedy Financial Planning.
Exacerbating the situation is the fact that most people in their twenties don’t think about retirement—baby or no baby. A Principal Financial Group study found that only 30% of Millennials save at least 10% of their income in an employer-sponsored plan.
By the time you hit your mid-thirties, however, “you’re more aware of all your financial obligations, and most of the folks who come to me [at this age] have a pretty good balance,” Kennedy says.
Indeed, an analysis of Employee Benefit Research Institute data that compared the nest egg savings of people in their early thirties versus their late thirties found that IRA balances jumped by more than 60% in this decade.
Even if Holly and Brendan never contributed another penny after baby, compound growth would help them reach a nest egg of $1.4 million by 67.
So Who Has the Advantage? Holly and Brendan. Being able to contribute aggressively to retirement before a baby comes along leaves them better able to take advantage of compound earnings, says Steve Erchul, a CPA with Smith, Schafer & Associates in Edina, Minn. “Their money could grow astronomically because they started early,” he adds.
Let’s assume Holly and Brendan have been able to save aggressively from age 26 to 36, with each of them putting $500 a month into their own retirement accounts, which return a hypothetical 7% a year. By 36, their combined savings are just shy of $174,000.
Even if they never contributed another penny after baby, compound growth would help them reach a total nest egg of $1.4 million by the time they retired at 67.<
Meanwhile, if Emma and Tyler put off saving as aggressively until 48, when their kid heads to college—each contributing $1,000 per month to their individual accounts to catch up—they’d end up with less than $950,000 combined at 67.
That’s about $450,000 less than Holly and Brendan.
Let’s Look at Baby’s Impact on College Costs ...
In theory, couples can start saving for college even before having a child, but it’s not usually on their radar until Junior arrives, says Kennedy.
So when it comes to the length of time to save, we’ll assume both couples have about 18 years. But one advantage Emma and Tyler have is their potential eligibility for tuition tax credits.
For example, the American Opportunity Tax Credit (AOTC)—which grants up to $2,500 per eligible student—doesn’t start to phase out for married couples until their modified adjusted gross income reaches $160,000, says Erchul.
So if this credit, or a similar one, still existed by the time Emma and Tyler’s child went to college, they could qualify for it—even if their income more than doubled by the time they reached 44.
But the terms of tax credits are hard to predict (the AOTC, for example, has been extended only through 2017 for now), so the real key here is who can contribute the most to a 529 or another type of college savings account.
“From what I’ve observed [of couples in their 20s], there’s not a lot of excess in their cash flow,” Kennedy says. “They’re more in survival mode.”
Holly and Brendan, meanwhile, may have more wiggle room in their budget to contribute monthly to a college savings account.
So Who Has the Advantage? Holly and Brendan. They’re likely to contribute more toward Junior’s college over the next 18 years.
Let’s assume Emma and Tyler put $50 a month into a 529, returning a hypothetical 7% a year. In 18 years, that would grow to a little more than $21,000.
As for Holly and Brendan, if they contributed $100 a month, their college investment could grow to more than $43,000.
Let’s Look at Baby’s Impact on Child Care Costs ...
Child care is, without a doubt, one of the heftiest line items in every new parent’s budget.
According to ChildCare Aware of America, the average cost to send one infant to day care eats up anywhere from 7% to 16% of a couple’s income.
With that in mind, Holly and Brendan seem like they’d be better off—with more income to work with, they should be better able to fit this cost into their budget.
But Emma and Tyler may actually be in a better position when it comes to free child care in the form of family help—Grandma and Grandpa may still be spry enough to run after a toddler.
In fact, Child Care Aware found that grandparents were the second most popular form of child care: 32% of those polled take advantage of their own parents’ help. That can be “huge in helping offset some of the cost,” Kennedy says.
Of course, there’s always the option of having one parent stay home. In this scenario, Holly and Brendan have the advantage, since “they’re at a higher pay level, so if they drop down to one income, it’s [still] a good income,” Kennedy says.
“I’ve had people come to me because they have six-figure student loan debt from law school, but they want to have their second baby.”
Many successful women (yes, it's still mostly women who off-ramp to raise kids) like Holly have a hard time re-entering the workforce.
The New York Times, for example, reported last year that only 40% of high-achieving professional women who off-ramped for a time were able to find a good full-time job in their desired industry once they returned to the workforce.
So Who Has the Advantage? It’s a draw. Yes, child care is a huge expense that Holly and Brendan may have more breathing room to cover—but factoring in family help and career opportunity costs could tilt the odds toward Emma and Tyler.
Plus, you shouldn’t count out the younger generation’s scrappiness when it comes to making room in a budget, says Michele Clark, a CFP® and owner of Clark Hourly Financial Planning in Chesterfield, Mo.
“I think because [the Millennial] generation saw their parents struggle with the stock market, they have more of that Great Depression mentality,” Clark says. “They shop at thrift stores, cook, and don’t eat at expensive restaurants.”
Holly and Brendan, meanwhile, are in a demographic that can be susceptible to lifestyle inflation because people their age are used to a comfortable life—and it may only get worse once toddler classes and day camps come into play.
“They’ll have to fight the spending creep of keeping up with the Joneses,” Clark says.
Ultimately, though, having a child isn’t all about pinpointing the opportune time. It’s also about knowing how to prepare yourself in heart, mind and wallet—no matter where you think you are financially.
“I’ve had people come to me because they have six-figure student loan debt from law school, but they want to have their second baby,” Clark says. “Because of that, they look at every penny ... and identify for themselves costs to cut [to reach that goal].”
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc., that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment, legal or tax planning advice. Please consult a financial adviser, attorney or tax specialist for advice specific to your financial situation. LearnVest Planning Services and any third parties listed, linked to or otherwise appearing in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.