How to Start a Family and Save for Retirement

Starting a family while saving for retirement comes with challenges and benefits. In most cases, time is on your side.

If you start early, you still have plenty of time to grow your retirement savings and benefit from compound interest. And there are a number of tax-advantaged plans out there to help you do so without incurring a huge tax bill.

On the other hand, starting relatively young means you may still be building your career and income. According to Vanguard’s “How America Saves 2024” report, the average retirement savings account balance for ages 35 to 44 is $91,281. For ages 25 to 34, that number is just $37,557. On top of that, there’s buying a home, a car, and paying for your children’s college and weddings to account for.

The good news is that with the right tools and strategies, planning for both your family’s needs and your retirement is entirely possible.

Costs to Consider

In general, the stereotypical American Dream is becoming more expensive. Take the average cost of raising two children until age 18, estimated at $576,896. The average amount needed to retire is even higher, clocking in at $715,968, according to Investopedia’s analysis.

Understanding the various costs you may face is the first step to preparing for them. Couples or individuals who are starting a family should consider the following.

Having a Baby or Adopting

If you’re enrolled in a large group plan, out-of-pocket costs for a hospital birth average $2,854 per child. Fertility treatments such as IVF can be extremely costly, requiring the couple to take on debt. When it comes to adoption, costs vary widely depending on whether you adopt via the public child welfare system, a private agency, independent adoption, or intercountry adoption.

According to the Child Welfare Information Gateway from the U.S. Department of Health and Human Services, adoption from a private agency may cost $30,000 to $60,000.

Independent or intercountry adoption ranges from $20,000 to $50,000, whereas adopting a child from the welfare system is virtually free. The associated expenses may include home study, court and legal fees, and social work or counseling services.

Paying for Child Care

Child care has long been a substantial expense for families. The U.S. Department of Health and Human Services deems child care as “affordable” when it costs no more than 7% of a family’s household income. Yet many families spend 10% to 24% of household income on child care.

Childcare costs vary by state. For example, the average cost of infant care in Alabama is around $500 per month and $432 each month for a 4-year-old. In California, the average monthly cost of infant care is $1,412, and $956 for a 4-year-old. And in Michigan, you’d pay an average of $905 per month for infant care or $741 per month for a 4-year-old.

Saving for Higher Education

Putting your kids through college is a major cost, no matter how you slice it. For the academic year 2022–23, the average total cost for full-time undergraduate attendance was $33,600 at a private for-profit institution and $58,600 at a private nonprofit institution. Meanwhile, public institutions had an average total cost of $27,100.

These amounts represent the sum of tuition and required fees, books, supplies, and the average cost of room and board for students living on campus at four-year institutions.

Assess Your Financial Situation

Evaluating your current financial situation is a crucial step toward reaching your personal financial goals. A thorough assessment of your income, expenses, and savings potential will provide valuable insights into your overall financial health and areas for improvement.

Here are key aspects to consider when assessing your finances:

Income

Calculate your gross annual income by adding up all sources of earnings, such as wages, salaries, self-employment profits, interest, dividends, and rental income. Be sure to account for any changes in employment status, promotions, or new job opportunities throughout the year.

Expenses

Create a detailed list of all ongoing and ad hoc expenses, categorizing them accordingly. Common categories include housing, utilities, food, transportation, insurance, healthcare, debt payments, entertainment, subscriptions, and miscellaneous expenses.

Savings Potential

Determine your disposable income by calculating the amount left from your income after paying taxes and necessary expenses. Then, evaluate whether you have enough funds available for emergency savings, retirement planning, investments, and discretionary spending.

Establish Family Priorities

With an understanding of the costs involved and a clear picture of your financial situation, you can begin to prioritize and outline future goals—both for your family and your retirement. Specific goals will depend on you, your partner, and your financial situation. But the following are a good place to start:

Start or Grow Your Emergency Fund 

If an unexpected car repair, pet expense, or medical emergency suddenly popped up, would you have enough cash to cover it? What if you got laid off next month?

If you aren’t prepared, an unexpected expense could derail your savings plans. That’s why financial experts always recommend having an emergency fund to cover three to six months’ worth of living expenses. If you’re self-employed or your income is unpredictable, you’ll want to save even more.

Having a safety net set aside keeps you from having to use credit cards or dipping into your retirement savings. The best place for an emergency fund is a liquid and thus easily accessible account, such as a high-yield savings or other interest-earning account.

Put Retirement First

When setting financial goals, it’s natural for parents to want to put their children first. However, financial planners recommend prioritizing your own retirement over saving for a child’s education.

While students have access to loans, grants, and scholarships, there are no such resources for parents. Saving for retirement falls largely on the individual—with some help from your employer if you’re lucky.

So, contribute as much as you can to your retirement savings accounts, and take advantage of any 401(k) or Health Savings Account (HSA) matching programs that your company offers.

Plan Ahead for Education Savings 

Once you hit your retirement savings goals, the next step is saving for your kids’ college tuition. A 529 plan is a great way to do this since it’s specifically designed to help pay for higher education.

This tax-advantaged account allows contributions to grow federal income tax-deferred, with tax-free withdrawals for qualified higher education expenses (such as tuition and room and board).

Establish Short-, Medium-, and Long-Term Goals for Your Family 

For families who may feel overwhelmed by competing financial goals—like buying a home, saving for a child’s education, or retirement—Mike Kojonen, founder of Principal Preservation Services, recommends setting goal milestones.

“For example, rather than seeing retirement as a distant, abstract aim, break it down into actionable steps like increasing retirement contributions annually or setting up a dedicated college savings fund for their children,” he says.

These targets can be broken down into specific short-, medium-, and long-term financial objectives for your family. For instance, building an emergency fund, contributing to employer-matched retirement plans, and establishing a consistent saving habit might serve as short-term goals.

Long-term goals often include caring for aging parents or, if your children are young, saving for their college education. Medium-term goals (say, five years) could include a family vacation, buying a new car, or remodeling your home.

Mark Damsgaard, head of client advisory at Global Residence Index, also recommends that couples discuss whether they’ll keep some assets separate or share all assets.

“It’s not wrong to not share the entirety of your assets, especially if you worked hard for them on your own. And then you may talk about having joint accounts for the earnings and assets you acquire when you enter your marriage or partnership,” Damsgaard says.

Revisit Your Budget

Achieving financial goals is often easier when you have a budget to give structure and clarity to your spending habits. A budget works best when it’s based on the specifics of your situation.

Use what you’ve learned about known costs for major goals like family and retirement, your financial situation, and your long- and short-term goals to set a realistic budget. Compare the following common budgeting models to see what works best for you.

50/30/20 Rule

The 50/30/20 rule suggests allocating 50% of income to needs (such as housing, food, and utilities), 30% to wants (entertainment, dining out, and hobbies), and 20% to savings and debt repayment (including retirement savings). While it may not work for everyone, this rule is popular because of its simplicity.

Progressive Budgeting

With progressive budgeting, you gradually increase savings and retirement contributions as your income grows or your family’s financial situation improves. Progressive budgeting is particularly useful in working against lifestyle creep, a common phenomenon that can eat into your retirement and family savings if you aren’t careful.

Pay Yourself First

Pay yourself first is exactly what it sounds like. You set aside money from your income for debt payments and savings, including retirement contributions, before taking care of other bills.

Of course, you still need to account for rent and other ongoing expenses. But this method, sometimes called reverse budgeting, makes it easy to prioritize savings goals. For example, you could set up automatic transfers or contributions to retirement accounts before allocating money for other uses.

Tips for Balancing Saving for a Family and Retirement

Reducing costs and maximizing tax benefits mean more money that you can put toward retirement or family goals.

See Where You Can Reduce Costs 

Lowering your childcare bill can amount to major savings. Consider enlisting help from neighbors and family members or arranging childcare swaps with other parents. Some states also offer government-funded assistance programs to help families pay for child care.

Government resources include Head Start and Early Head Start programs, state-funded prekindergarten programs, military childcare financial assistance programs, and government vouchers or subsidies. You should also see if your employer offers a Dependent Care Flexible Spending Account (FSA).

To save money beyond childcare costs, look into other possibilities like:

• Mortgage refinancing to reduce your monthly payment
• Adjusting your thermostat or using energy-efficient bulbs to save on utility bills
• Carpooling, using public transportation, or walking/cycling to trim transportation costs
• Cutting food costs by cooking at home, buying store brands, and planning meals ahead of time

Maximize Tax Benefits 

There are tax benefits designed to help families save money, including:

• Child Tax Credit (CTC): The CTC provides a tax credit of up to $2,000 per qualifying child under the age of 17. For 2024 and 2025, up to $1,700 of the tax credit may be refundable, depending on your tax situation
• Child and Dependent Care Credit: This credit covers expenses for child care services, such as babysitting, daycare, or preschool, for children under age 13 or disabled spouses or parents. The credit ranges from 20% to 35% of expenses up to $3,000 for one dependent and $6,000 for two or more dependents.
• Earned Income Tax Credit (EITC): Low- and moderate-income working families can benefit from the EITC, which reduces the amount of tax owed and may result in a tax refund. The credit is based on a percentage of earned income, with higher income phaseouts for taxpayers with children.
• Credit for Other Dependents: This is available to taxpayers with a dependent who doesn’t qualify for the Child Tax Credit, such as children age 17 or older, qualifying relatives, or dependent parents.
• Self-Employed Health Insurance Deduction: This permits self-employed parents to deduct 100% of the cost of health insurance premiums paid for family members, including children under age 27.

Take Advantage of Retirement Savings Options

Use tax-advantaged retirement accounts to maximize savings and growth.

• 401(k) Plans: Employer-sponsored 401(k) plans allow employees to contribute a portion of their salary toward retirement savings, often with employer-matching contributions.
• Individual Retirement Accounts (IRAs): Traditional IRAs are personal retirement accounts that provide tax-deferred growth, while Roth IRAs offer tax-free withdrawals in retirement.
• Simplified Employee Pension (SEP) IRA and Savings Incentive Match Plan for Employees (SIMPLE) IRA: SEP and SIMPLE IRAs let small business owners and self-employed individuals save for retirement while receiving tax benefits.
• Health Savings Accounts (HSAs): For families or individuals with a high-deductible health plan, HSAs offer flexible options for saving money on healthcare or boosting retirement savings.

The Bottom Line

Armed with knowledge about your goals, potential costs, financial situation, and available tools for investing, you can achieve a comfortable retirement while also growing a family. Start early and contribute consistently to retirement savings in order to maximize your savings and growth potential. If needed, seek professional financial advice to help you navigate the complexities of retirement planning and evaluate the best decisions based on your specific situation.