Commonly, retirement advice leans heavily towards families with children, focusing on juggling the costs of child rearing and college while also trying to amass a substantial retirement nest egg. However, this doesn't apply to everyone, as a notable percentage of households are "dual-income, no kids," also known as DINKs. The absence of children in these households changes the game when approaching retirement planning.
Estimations of the overall cost of raising a child often fall short. The Brookings Institution in a 2022 forecast came up with quite a startling figure; raising a child born in 2015 through to the age of 17 would cost around $310,605, excluding their college fees.
This projection was an updated version of a previous estimation from the U.S. Department of Agriculture (USDA), which set the cost of raising a child for a mid-income married couple with two children at $233,610 in 2015. Brookings retouched this figure by accounting for inflation at an average annual rate of 2.23% from 2015 to 2020, with an inflation rate of 4% for 2021 onwards.
If your household falls amongst the childless, this translates to a significant extra amount of cash at your disposal. Making sense of that could mean an approximate saving of $18,270 annually ($310,605 ÷ 17 years).
What could be accomplished with an additional $18,000 a year saved by opting not to have children? A major opportunity is presented in the sphere of retirement planning, where DINKs have a marked advantage over parents. Investing these saved funds can make a significant difference in building a robust nest egg. Moreover, placing some or all of this extra savings towards retirement could provide attractive tax benefits.
One widely adopted financial guideline recommends using a fixed percentage for retirement planning, relying on variables such as actuarial trends, cost-of-living expenses, and income rates. Often, this number lands around 4%.
Bill Bengen, a certified financial planner who helped popularize the 4% rule in the early 1990s, concedes that percentages of 4.5% or 5% might be better suited for investors in securities with higher volatility and potentially higher return rates. Thus, for DINKs who save an additional $18,270 per year for 18 years of their working life, the 4% rule might not even apply. This savings could lead to retiring earlier, or enjoying a slightly extravagant annual retirement spending.
If saving the extra $18,270 was done diligently and consistently, it's viable to retire eight years earlier than the usual timeline - assuming a $1.5 million retirement fund that allows a 3% annual withdrawal.
Let's take an example. Assuming a childless worker saves an additional $18,270 for 17 years from age 25 onwards. With a 4.5% compounding annual return, that worker would accumulate an extra $490,642 by retirement - a sum otherwise unavailable for a parent. Leave that sum invested at 4.5% without extra contributions until age 65, and you'd find yourself with a balance of $1,350,328- looking at a comfortable retirement indeed.
Childless couples have the ability to contribute more to their retirement fund. Given their greater financial flexibility, they can more easily maximize their 401(k) contributions, in tandem with their employers' match. As the 401(k) contribution limit is scheduled to rise from $22,500 in 2023 to $23,000 in 2024, the path to a substantial retirement pot looks even smoother.
Dominique J. Henderson Sr., owner of DJH Capital Management LLC, emphasizes the importance of a considered approach to tax. "A childless couple will most likely have a higher tax liability and therefore need to find tax-efficient ways of investing." Less life insurance will likely be required given the absence of dependents.
The fundamental pillars of retirement planning still apply to DINKs. Refraining from cashing out your 401(k) prematurely, delaying Social Security payments until the latest allowable age, and strategically utilizing spousal benefits remain important areas to focus on.
Financial circumstances greatly vary for different individuals, but for many, not having children significantly reduce monthly expenses, enabling a bolstered retirement savings. Despite not receiving the same tax benefits as counterparts with children, DINKs often have the financial freedom to explore and live fully during their years of retirement.
Being a DINK is not always a personal decision, often not based on financial security. However, the financial benefits of not having children can provide a smoother and potentially earlier pathway to retirement. Not everything is quantifiable, and as parents would attest, the joy and fulfillment of seeing a child grow and succeed has its unique rewards that are priceless.