CAN YOU AFFORD YOUR KIDS? The answer can be upsetting -- unless you make the right financial moves now to meet the truly staggering expenses you will face.
(MONEY Magazine) – Like most parents, Blake Magee's mother and father want only the best for their 15-month-old son. Since both Jennifer and Donald work, they pay a nanny to take care of Blake (left), and hope to place him in preschool next year. Then he will go to private elementary and secondary schools -- a common choice for middle-class parents in New Orleans, since Louisiana public schools produce students whose college entrance exam scores are among the nation's lowest. Later, the Magees hope to send Blake to the best college that will accept him. ''I was raised in Alabama and went to a state college because I couldn't afford the better-known private universities,'' explains his mother. ''I want a more worldly upbringing for Blake.'' But until recently, Jennifer, 38, and Donald, 35, like most parents, had never calculated the real cost of their dreams. Let's start with the basics. The U.S. Department of Agriculture says the average family earning $50,000 or more will spend $265,249 to feed, clothe and shelter a child to age 22 (see the illustration on pages 92 and 93). Next, tack on the three years at the preschool the Magees want, which now costs $7,200 a year (and will cost $24,297 altogether, allowing for 6% annual inflation); plus a $5,000-a-year parochial elementary school ($66,200); private high school, now $10,000 a year ($93,300); seven years of tennis lessons starting when Blake turns 10 ($20,400); an Ivy League diploma ($280,500) . . . You get the idea. When fee-only financial planner Gus W. Schram III of Lake Charles, La. put these and other projected expenses together, he estimated the Magees will need $747,920 to raise Blake in the style they envision. To meet that plus their own retirement expenses, he says the Magees, who jointly earn $75,000 a year running the small advertising agency she founded, should be saving more than $30,000 a year -- three times what they are putting away. ''It's shocking to see these numbers in black and white,'' said Donald when MONEY confronted him with this financial reality. ''But it's good to know, because it scares me into facing the fact that we need to do something about it.'' Parents already know intuitively that children are expensive, of course. Economists say that part of the reason couples are having smaller families -- an average of only two kids in 1989, vs. 3.7 at the height of the baby boom in 1957 -- is that they fear the expense of a large brood. But like the Magees, few have actually calculated the impact on their budget. Indeed, it is to help them comprehend the enormity of the expense that we include the full effects of inflation in all numbers cited here. Fortunately, there are steps couples can take to prepare themselves -- including several that many do instinctively. As Ed Yardeni, chief economist at Prudential-Bache in New York City, observes: ''Having children makes you realize you're not immortal -- that it's time to buy life insurance, save for college and figure out some way to support yourself in retirement so your kids don't have to.'' Curiously, the cost of child rearing is high, not because the basic expenses have changed, but because the price of extras like a college education -- once considered a luxury but now almost a necessity -- have gone through the roof. Food, clothes and shelter for a single child consumed about 30% of average family spending in the 1960s and roughly the same proportion in the 1980s, according to Princeton sociologist Thomas Espenshade. But a year's tuition, room and board at a private college, which claimed 28% of median family earnings in the 1960s, absorbs 35% today, while the bite of a year at Harvard has shot from 42% to 57%. The one piece of good news: expenses at state universities have remained stable at about 14%, but that's only because state taxpayers have been generous enough to pick up the difference. In addition to college, there are all the other advantages that middle-class families like to provide -- music lessons, athletic gear, summer camp and so on. When you include them, you reach totals that leave parents gasping. Moreover, a series of social, demographic and economic trends threaten to make child rearing even less affordable in years to come. They include: More preschoolers will need child care or nursery school. Nearly a quarter of all families with children are headed by a single parent today, compared with only 10% in the mid-1960s. And the proportion of households with two wage earners has jumped from 44% to 57% in that time. With experts forecasting that both trends will continue, an increasing number of parents will pay $2,000 to $10,000 a year for group day care or $9,000 to $20,000 for full-time, in-home child care. More parents will send their kids to private elementary and secondary schools. As families fled America's failing public education system during the 1980s, enrollment at private institutions rose 17 times faster than at public schools. With top private academies charging $5,000 to $10,000 a year, the cost can easily equal that of four years at an expensive college. As Desiree Cooper of Detroit (see the profile on page 98) complains, ''When our parents talked about saving for our education, they meant putting away money we'd need at age 18, not age 3. How do you get a chance to save when you're paying out so much from the start?'' The cost of private higher education will continue to outpace inflation. It won't go up twice as fast as the consumer price index, as it did in the 1980s, but its rate of increase should hover one to two percentage points above inflation's. The trend may not abate until the baby boomer's kids swarm onto campus starting in 1995 -- thus allowing colleges to spread their fixed costs over larger student bodies. Slower housing appreciation will give families less equity to tap. Many couples count on second mortgages or home-equity loans to bail them out if they need money for college. The assumption is that home values will increase considerably. John Savacool, an economist at the WEFA Group, a Bala Cynwyd, Pa. forecasting firm, says, however, that the price of most single-family homes will rise at rates only one-half to one percentage point above inflation in the 1990s -- not the three points over inflation of the '70s and '80s. Marketers will be blitzing your kids with tempting ways to spend money. With lures like the Simpsons and Ninja Turtles, a recent Forbes magazine reports, retailers sold some $60 billion in goods aimed at youngsters ages four to 12 last year -- up 25% from 1988 -- and may sell $75 billion this year. For many of today's parents, college costs and retirement costs will collide. The growing number of couples who wait until their thirties or forties to have a baby will not finish putting that child through school until within 10 years of their own retirements. If they run short of cash, they may have to borrow from a tax-deferred retirement account, remortgage their home or take on other loans just when they should be paying down debt and maximizing their savings. But wait! Don't let these dismal facts persuade you to put your kids up for adoption. Even couples who are just starting families, and who thus face the biggest expenses, have several factors working for them. The most important is income. The average college graduate's income rose at a rate about two percentage points above inflation during the past two decades, according to estimates based on Census Bureau figures, and that small-sounding edge can have dramatic effects. If Jennifer and Donald Magee's income beats inflation by that margin from now until 2011, they will meet their expenses and still accumulate $769,278 in savings; if it only keeps pace with inflation, they will exhaust their savings by 2004. Additionally, many of today's baby-boomer parents could receive a sad but helpful windfall when their own parents pass away. Americans 55 and older hold assets of $6.5 trillion -- the largest pool of inheritable wealth ever amassed in a single country. The only question is, how much of those riches will actually be passed on? Since people are living longer these days, medical expenses -- including nursing-home care -- could swallow some of that pot. Furthermore, Congress is debating whether to reduce the $600,000 that people can pass to their heirs without incurring any federal estate tax. To be safe, we recommend you leave inheritance and the possibility of your income topping inflation out of your financial plan. There are other factors, however, that you can control. Some dos and don'ts: Boost your savings, and do it today. Starting soon makes a big difference. To raise the $300,134 required to give a 1990 baby an Ivy League education, for instance, you would need to put $8,165 a year into an investment earning 9% annually if you began now. But if you waited until the child entered first grade, your annual bite would rise to $15,400. Put your savings where they will earn the most over the long haul. There are few good savings vehicles for college these days (see Editor's Notes on page 7). Among the available options, though, the Series EE U.S. Savings Bond offers significant advantages for families with adjusted gross income of less than $60,000. Their earnings on these variable-rate bonds that now pay 7% are completely tax-free if the money is used to finance college (though the federal tax break phases out as the couple's AGI approaches a $90,000 cutoff). & Traditional savings instruments such as EEs, zero-coupon bonds and CDs should make up only half of your portfolio, however, if your child is at least 10 years away from entering school. The rest should go into more aggressive investments, such as growth stocks or no-load growth mutual funds. They usually pay more and, while they are riskier, the fact that you will hold them for years makes you less vulnerable to short-term fluctuations. If you think you might qualify for college financial aid, don't put savings in your child's name. Parents traditionally park college money under their young one's name, since that way the first $500 in investment income is tax- free; the second $500 is taxed at the child's tax rate; and only the portion over $1,000, if the child is under 14, gets taxed at the parents' usually higher level. And after age 14, all earnings past $500 are taxed at the child's rate. If a child has substantial wealth, however, his financial aid package suffers, since he must contribute 35% of his assets a year toward education, while his parents need pay only 5.6%. ''I've seen parents save a few hundred dollars in taxes over the years only to lose several thousand dollars in financial aid as a result,'' says Kalman Chany, president of Campus Consultants, a financial aid counseling firm in New York City. If both parents work, consider whether one of you should stay home and raise children. Child care is not the only expense you incur when both of you have full-time jobs. There are also costs for commuting, business clothing, meals at work and so forth. When you add those up, it may be better all around for one parent to take care of the kids and go back to work later. This is especially so if you learn to live on one salary and then save the entire second salary when the child raiser returns to work (see the profile starting on page 98). Set realistic goals. Chances are you will find that you simply cannot afford everything you want for your kids -- private secondary schools, for example, plus an expensive college. If you can't, remain open to compromise. Perhaps you could send your offspring to one of the many excellent state-supported colleges, for example. In the pages that follow, we present a representative trio of toddlers and their parents. To help each of the families face up to the real costs of raising their kids, we got specific advice from financial experts. Their stories:
THE TOT WITH AN IVY LEAGUE DESTINY The life of Anne Jarvis, 2, is being shaped by a conversation her father had with his own parents 19 years before she was born. ''They called in one of my sisters and me,'' recalls Andrew Jarvis, 37, a Philadelphia architect, ''and told us they couldn't afford to pay for the four of us kids to go to college. It was a little scary because the reality of having to make your own way in the world had never hit me before.'' Andrew and his three sisters all met the challenge by going to college with the help of jobs, scholarships and loans. But now he and his wife Liz, 35, a museum curator, hope never to have the same conversation with Anne. That hope, plus their ambitious educational plans, will push the cost of raising her to $638,038 over the next 20 years. The Jarvises, who live in a 19th-century brick row house in the Fairmount section of Philadelphia, spend $4,200 a year to send Anne's four-year-old sister Judy to preschool three days a week. Later, they hope to place both girls -- plus the baby coming this summer -- in the well-regarded, private Germantown Friends School at an annual cost that ranges today from $5,325 to $8,400. ''We're willing to spend a lot on early education because that's when children learn their study habits,'' explains Liz. They also want enough money set aside to cover Ivy League educations -- a total of $776,274 for all three scholars. Fortunately, the Jarvises are careful budgeters. Starting with $13,000 inherited from Liz's family in 1986, they have socked away enough of their combined $96,000 annual salary to accumulate $125,700 in savings -- $79,000 in retirement accounts and the rest in CDs, stocks and savings bonds. They do not count on their income rising much, however, since architects often suffer boom and bust building cycles, and they do not expect more inheritance. As a result, they are already making trade-offs. ''If we weren't thinking about the kids,'' muses Liz, ''we would have been to Europe twice in the past five years, rather than taking long weekends in Gettysburg or Williamsburg.'' They have also deferred their dream of a larger house with a yard big enough for Liz to indulge her passion for gardening. For the time being, they will stick with their current home and its low 8 1/2% fixed mortgage on which the monthly payment is a modest $565. Despite the Jarvises' frugality and savings, Robin Sherwood, a fee-only financial planner with Westbrook Financial Advisers in Norwalk, Conn., says the couple will fall $337,352 short of their goals by the third child's graduation in 2011. ''The problem is the heavy primary and secondary school expense,'' she says. ''And there's not much room to cut corners, since they don't live extravagantly now.'' Sherwood points to a way the couple can reduce the shortfall. They could send the kids to public schools and thereby increase their savings to $30,000 a year, which would cover college costs. But the Jarvises resist that because, says Liz, ''we will never get the chance to give our kids that educational foundation again.'' Alternatively, they could take a loan against their home, which will be paid off by 1999, to raise money for college when their savings run out in 2006. If Philadelphia home values only keep pace with inflation, their property will be worth $450,000 that year. But Sherwood argues that the loan shouldn't exceed $100,000 -- partly so they can pay it off before Andrew reaches retirement and partly for tax reasons. The tax consideration: interest on a mortgage or home- equity loan is fully deductible only if you borrow no more than $100,000 in excess of what you intend to spend on the house (which, in the Jarvises' case, will probably be nothing). Ironically, the best way to pay for college may be the one the Jarvises had hoped to avoid: asking Anne and her siblings to work or borrow. If the Jarvises had two children in college today, as they will for three of the nine years the kids are in college, they would be eligible for $10,000 in aid at each of two $20,000-a-year schools, says Chany of Campus Consultants. It's an option the Jarvises are already showing signs of accepting. ''Loans would not be the end of the world, since there is value in kids taking responsibility for their education,'' concedes Liz. ''We just don't want them to have an overwhelming burden.''
NOTES ON A FUTURE PIANO PLAYER Jay Hollowell may not know it yet, but he's headed for five years of piano training. At least that is what his parents are planning for him -- at a cost of about $6,500 altogether -- and also for his sister, due to arrive in September. ''We had to suffer through piano lessons, and so we think our kids should too,'' jokes their father, Butch. Adds his wife, Desiree Cooper: ''If they have tin ears, then we'll send them to baseball camp instead.'' But whether it's Bach or baseball, the Hollowells' desire to give their kids a leg up is one reason they will spend $594,572 on two-year-old Jay in the next 20 years. Already the two 30-year-old Detroit attorneys pay $600 a month for Jay's babysitter and $160 a month for the preschool he attends two days a week. In a few years, they would like to be able to send both their children to the parochial elementary school (its estimated cost: $3,000 a year) that Butch attended and later to one of Detroit's excellent ''magnet'' public high schools. After that, they want the option to select a private college at a projected cost of $187,777 for Jay. The Hollowells meet these and other current expenses out of their combined $125,000 income (Butch is an assistant Wayne County executive; Desiree serves as the general counsel for New Detroit, an urban think tank). For the future, they have set aside about $8,200 in CDs and savings bonds and $35,000 in Butch's pension and deferred-compensation plans. Their main savings vehicle, however, is their home, a five-bedroom Tudor in Detroit's Palmer Woods section that they bought last year for $200,000. But paying for it is squeezing their cash flow. The basic $160,000 mortgage runs $1,410 a month, and there are second and third mortgages as well, bringing the combined bills to nearly $2,700 a month. ''We knew this house was more than we could comfortably afford right now,'' acknowledges Desiree, ''but it's an investment that we can borrow against in the future.'' Walter Kerrigan, a fee-only certified financial planner from Dearborn, Mich., questioned that strategy. ''They have wagered their children's future and their retirement on the bet that their house will increase in value,'' he says. He thinks they should be saving an additional $2,515 a month towards education -- an impossible sum, given their huge debt. If they moved to the suburbs, he says, they could cut their property tax to a third of its present $805-a-month level. But the Hollowells resist the idea. A new house wouldn't be as spacious as their current digs. Besides, says Desiree, ''We love where we live, and we still think it has great appreciation potential.'' Another alternative: they could send their children to any of Michigan's excellent state colleges. That would slice Jay's $187,777 college outlay to only $67,136. Again, the Hollowells say, they would prefer to hold out for private college if they can afford it. A third alternative, says Kerrigan, is to send their children to public elementary school, thus reducing their $2,515 monthly savings requirement to $1,360. That sum is still beyond their means today but would not be in five years, when Desiree could double her salary by returning to a corporate law practice -- something she has avoided so far, partly because her current job allows time for her children.
Faced with the cost figures, the Hollowells were inclined to pass up parochial school. ''It probably would be a good thing if parents like us got involved in the public schools,'' said Butch. ''We're going to have a revolution in this country if we foster a system where only people of well- above-average means can afford a decent education.''
BABY WITH ONE OF THE WORLD'S BEST BABYSITTERS Jillian Terwedo, now 17 months old, went through two $600-a-month nannies in the first half-year of life, leaving her parents -- Randy, 31, and Shannon, 32 -- fearful that their daughter would be raised by a succession of strangers. ''At the same time,'' remembers Randy, ''we happened to read an article that said we needed to save 15% of our income just to maintain our present life style in retirement. That woke us up. We realized there was no way we'd ever have enough for both child rearing and retirement unless we could learn to cut our expenses.'' Indeed, when all the costs are added up, the Terwedos will lay out $651,780 just for Jillian over the next two decades. Aiming to solve both the financial and the child-care problems at once, they took an unusual step: Randy quit his $31,000-a-year job as a substance-abuse- prevention coordinator for the city of Phoenix to further his education and raise Jillian himself. ''If we can learn to live on one salary now,'' says Randy, ''then we can devote my entire salary to savings when I do go back to work.'' He plans to rejoin the work force after the second child they hope to have enters preschool in three to five years. In the meantime, he's finishing a master's degree in human-services planning and administration that could boost his future earnings. Choosing which partner would stay home was the easy part of the decision. ''I'm a compulsive workaholic, and I'd have a neurotic child if it were me,'' jokes Shannon, the $67,000-a-year head of the health maintenance organization at St. Luke's Hospital in nearby Tempe. Although their savings amount to less than $10,000, fee-only planner D.R. Whitson of Whitson Financial in Phoenix says the Terwedos can meet their bills if they stick to their plan. Assuming Randy starts making about $38,000 a year in 1993 and that both his and Shannon's earnings grow at a modest 5% annually thereafter, the family would accumulate $793,269 by the time Jillian finishes high school -- more than enough to educate two kids. And when she leaves college, her parents will still have $981,556 for their own retirement. ''The key is kicking Randy's entire income into savings,'' says Whitson. ''His contributions alone will cover her college costs just four years after he returns to work -- when she is still 10 years away from enrollment.'' If their program succeeds, Shannon will give part of the credit to their decision to delay raising a family until their thirties. ''We've already had our 'selfish time' together,'' she says, ''so we're ready to make financial sacrifices for a child.''
BOX: YIKES! WHAT YOUR KID WILL COST No-frills cost to age 22: $265,249
You'll spend at least $265,249 to raise him or her to 22 years of age, according to the U.S. Department of Agriculture. That includes housing costs of $84,880, food $61,007, transportation $39,787, clothing $18,567 and medical bills not covered by insurance $18,567. Moreover, economies of scale are minimal. Bringing up two kids will cost you $419,093 (or about $209,546 per child); three and four will run $568,959 and $758,612, respectively. And that's just the base sum. The illustration at right shows the prices of various add-ons, such as $27,606 for eight summers of camp. All the projections assume 6% average annual inflation, except for higher education, which calls for 7%. The bottom line: you can easily spend $500,000 to almost $1 million on your new child.
Plus $9,100 for three years of Preschool Plus $63,432 for four years of In-Home Child Care Plus $5,145 for six years of Piano Lessons Plus $27,606 for eight years of Summer Camp Plus $300,134 for four years of Ivy League College Plus $143,271 for Private Elementary and High School Plus $1,500 for a Personal Computer