Is Your Child’s Allowance Undermining Your Retirement?

Alamy Paying an allowance is a tried-and-true way for parents to teach money management skills to their children and provide a tangible reward for completing chores. But for many parents, this habit may come at the expense of a more important goal — saving for retirement.

With pension plans going extinct, Social Security’s long-term sustainability looking questionable, and savings rates sitting at unrealistically low levels, it could be time to rethink a practice many children (and their parents) take for granted.

Are You Paying Your Children More Than Your Future Self?

According to the 2013 “Parents, Kids & Money Survey” from T. Rowe Price, 47 percent of children receive an allowance. They average just shy of $10 a week (roughly $509 a year). That’s just enough for the occasional movie with friends or some purchase, with hopefully enough left to save a bit for the occasional big splurge.

That said, 26 percent of kids receiving an allowance are given between $11 and $40 a week. At the high end ($40 a week), that works out to $2,080 a year. For some parents, even that number may not seem remarkable. But put into context, it’s a different story.

Opportunity Costs

Let’s say you give your child $40 a week over eight years. That comes to $16,640. Now, let’s say you had instead invested that same amount in a low-cost market ETF and earned the market’s long-term average of 9.6 percent. After eight years, that investment would have grown to an impressive $25,694.

Here’s the kicker: That $25,694 total is more money than 57 percent of U.S. workers have saved for retirement, according to the Employee Benefit Research Institute. And if you pay one child just $20 a week for a year, that annual allowance of $1,040 is$40 more than 28 percent of EBRI respondents say they have saved for retirement.

As with all financial topics, every family is different. But if your retirement savings are less than $25,000 — putting you in the same boat as 57 percent of Americans — it might be smart to lower the amount you’re handing your kids and stash the difference in a retirement account.

Some argue that an allowance is a way to budget your children’s expenses and teach them to be responsible for their own purchases — meaning they are required to buy their own clothes, fund their own extracurricular activities, etc. And that’s a fine way to look at it. But if your nest egg is a hollow shell, you’re losing sight of the forest for the trees. Retirement should be the more important line item in your budget.

Explore Other Options

Rather than teaching your children to simply expect an allowance regardless of whether or not they deserve it, brainstorm ways to foster an entrepreneurial spirit in your offspring. Help them set up a small business based around a hobby. Encourage them to get their first job when they’re legally able.

You are trying to teach your children to be self-sufficient and prudently manage their own money. But it’s hard to teach that lesson if your own financial situation is grim.

Motley Fool contributor Adam Wiederman wrote this article with a vested interest in mind: he has four children (and a fifth on the way.) As such, his children commiserate with the other kids who may now similarly have to do chores without getting paid.

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