Child care is costing parents an average of $11,582 a year: How to prioritize retirement savings amid sky-high costs
The cost of infant care varies drastically across the U.S. – from about $8,000 a year in some states to as high as $25,000 in others.
According to Bankrate’s Cost of Infant Care Study, parents pay an average of $14,070 a year to put one infant child in full-time daycare. And overall child care costs are $11,582 on average per year, according to 2023 data from Child Care Aware of America. That’s more than many households budget for food, health care and transportation — and it may be cutting into parents’ ability to save for retirement.
Since 1991, day care and preschool costs have climbed more than 1.5 times faster than inflation, according to Bankrate’s analysis of Bureau of Labor Statistic data. That makes it even harder for the average family to keep up.
The high cost of child care can feel overwhelming, but there are resources to help.
Whether you’re preparing for a new arrival or getting ready to wrap up maternity leave, here’s what you need to know about the average cost of child care in the U.S. along with strategies to ease the financial burden so that you can prioritize your own retirement savings.
How much does child care cost?
Child care is a major expense for parents nationwide. Data from Bankrate’s Cost of Child Care Study reveals that full-time, center-based care for one infant costs at least 10 percent of a typical family’s annual income in 48 states and the District of Columbia.
In states like New York and Hawaii, the cost can soar to roughly 20 percent of a family’s yearly income. Surprisingly, even relatively affordable states like New Mexico and Kansas have high infant care costs.
The cost of infant care varies drastically across the U.S. — from about $8,000 a year in some states to as high as $25,000 in others. Generally, infant and toddler care is the priciest, with costs dropping as children get older. But the exact prices vary based on location, the type of provider, the child’s age and the number of children in a family.
The high costs of raising a child are pushing some families to rethink their budgets, dip into savings or even hit pause on their careers. For some, it may seem unfathomable to save for retirement when 20 percent of their income is going toward child care.
Jackie Ramirez, a mom of three in Orlando, Florida, paid $7,000 to put her 3-year-old son in day care in 2023. She and her husband spent another roughly $3,000 that year to cover after-school program costs for her two older children.
All told, Ramirez, an assistant bakery manager, estimates her family spent $10,000 on child care in 2023. She and her husband had to cut back to afford the massive cost.
“We don’t spend if we don’t have to,” says Ramirez, 32. “We have cheaper phone plans. We’re eating out only once a week, if that.”
Her husband, Jorge, picks up an extra shift at work when he can, but the family still has to get creative to cover expenses.
“Last year we couldn’t afford the after-school program for my two older kids without a scholarship,” says Ramirez. “At one point, we had family members picking them up and taking them to my in-laws until I got out of work.”
Why is child care so expensive?
Staffing costs are the main reason child care is so expensive in the United States.
Day care providers must follow strict adult-to-child ratios in classrooms and nurseries. These ratios, which vary by state and program, limit the number of children an adult can care for, especially for infants and toddlers. According to federal guidelines, one caregiver shouldn’t oversee more than three infants under the age of 12 months at a time. That means more staff, and more staff means bigger payroll expenses for day care operators.
Beyond payroll, child care providers must budget for supplies, food, expensive liability insurance, utilities, equipment and other expenses.
Despite high demand for caregivers, child care workers earn low wages on average. A recent Federal Reserve Bank of Chicago analysis found the median wage for child care workers ranks in the bottom 5 percent of all jobs. They earn a median of $14.60 an hour — less than the median wages of waitstaff, maids and housekeepers or retail salespeople.
Pandemic-era federal funding helped stabilize the industry temporarily, with $24 billion from the American Rescue Plan and nearly $14 billion from 2020’s relief package, helping day care operators pay competitive wages and retain employees. But in September 2023, that funding ran out, which could make child care costs even more expensive moving forward.
Need expert guidance when it comes to managing your investments or planning for retirement?
Bankrate’s AdvisorMatch can connect you to a CFP® professional to help you achieve your financial goals.
6 ways to prioritize retirement savings amid high child care costs
Child care costs can take up a significant chunk of a family’s income, potentially getting in the way of retirement savings. However, with some careful planning and budgeting, you can manage these costs while still planning for your future.
Here are six ways to help offset the high costs associated with child care. The more you can decrease those costs, the more you will be able to save for retirement.
1. Check out financial assistance resources in your community
Navigating the high cost of child care can feel overwhelming, but there are resources to help.
To explore potential assistance programs, consider reaching out to your local or state family services office. They can provide valuable information on available resources, tax breaks and financing options. Child care resource and referral agencies offer personalized guidance to help families find suitable child care options in their area.
And this state-by-state child care resource database by Child Care Aware of America can be a helpful tool for identifying local providers and support programs.
Depending on your income and family size, you may qualify for programs like Head Start, government subsidies or financial aid from nonprofits like the YMCA or United Way. For some families, informal care arrangements with grandparents or other relatives can be a viable option.
2. Claim child care tax credits
If you qualify for the child tax credit, it could lower your tax bill — or even boost your refund. That means more money in your pocket to put toward child care.
Through the child tax credit, parents can claim up to $2,000 for each qualifying child under age 17 in the tax years of 2024 and 2025. The income thresholds are generous, too. You can qualify for the full credit amount so long as your annual income is less than $200,000 for a single filer or $400,000 for a married couple. The credit starts phasing out after those thresholds.
The best part? A portion of the credit is refundable through the additional child tax credit. So, even if you owe no taxes, you could still receive up to $1,600 per child as a refund.
Finally, the child and dependent care credit is a tax break designed to help families offset the cost of child care, so parents can work or look for work.
If you paid for child care expenses such as babysitting, day care or summer camp, you may be eligible for up to $3,000 for one qualifying person and $6,000 for two or more in 2024.
The “work-related” requirement is important. For example, child care costs incurred while you were on vacation wouldn’t count as qualifying expenses.
In addition to federal credits, some states — such as California, Colorado and New York — offer their own child tax credits.
3. Automate your savings — even if you only save a little
When you’re faced with a massive ongoing expense like child care, it’s easy to let savings fall by the wayside. But skipping out on building a rainy day fund or saving for retirement can cost you even more down the road.
If you’re considering cutting back on contributions to your 401(k) or workplace retirement plan, aim to still contribute at least enough to receive the company match, which is often 4 to 6 percent of your salary. This free money can significantly boost your retirement savings.
If money is especially tight, saving something — even 1 or 2 percent of your income — is better than saving nothing. Consistently saving at a lower rate while you pay for child care is more beneficial than maintaining a higher contribution rate only to raid your 401(k) in a couple of years by making a hardship withdrawal or taking out a loan.
Remember, child care expenses, while challenging, are temporary. Once your little one starts kindergarten, you’ll (hopefully) free up some room in your budget, making it easier to ramp up retirement contributions and rebuild your savings.
4. Sign up for a flexible spending account (FSA) at work
A dependent care FSA can be a valuable workplace benefit for offsetting child care costs. You can fund the account throughout the year via payroll deductions and use those pre-tax dollars to reimburse your child care costs. By contributing to this type of FSA, you can reduce your taxable income and save money on your tax bill.
You can contribute up to $5,000 per year to a dependent care FSA. However, it’s important to note these accounts operate on a “use it or lose it” basis. Any unused funds at the end of the year will be forfeited.
5. Talk to your employer
Many companies offer benefits, resources or flexibility that can ease the financial strain of child care. Your boss might be open to letting you work from home one day a week after your maternity leave ends, for example, which could save you money on day care.
Here are a few benefits of talking to your employer about your child care needs:
- Workplace benefits: Some companies offer child care subsidies or partnerships with local providers for discounted rates. Maybe you didn’t pay attention to these benefits when you started your job, but now is a good time to get familiar with them.
- Flexible work schedule: Discussing hybrid work schedules, remote work or adjusted hours can help you manage child care needs and cut costs.
- Advocate for new benefits: Highlighting your needs could encourage your employer to explore additional family-friendly policies, like expanding paid parental leave or offering new child care support programs.
6. Take a hard look at your budget
Unless you have hundreds (or thousands) of dollars lying around at the end of the month, paying for child care is going to require a major overhaul of your monthly budget.
Start by taking stock of your spending. If you don’t already have a budget, comb through your bank statements and receipts from the past few months and identify areas where you can cut back. Consider reducing expenses on nonessential items like dining out, streaming services and clothing. Even small cuts across categories can add up.
Don’t neglect your essential expenses either. Look for ways to save on groceries, phone bills and housing costs.
Cutting costs isn’t the only way to add wiggle room to your budget. You can also look for ways to earn more money. This could involve asking for a raise, finding a better-paying job or taking on a side hustle. Finding ways to boost your income without upping your child care expenses puts you ahead of the game.
Bottom line
Child care costs can feel like a second mortgage, averaging over $11,000 annually, but they don’t have to drain your finances entirely. By leveraging tax credits, FSAs, community resources and workplace benefits — along with some major budget tweaks — you can add some breathing room to your finances without sacrificing your long-term goals.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
