Paying for pricey daycare? Here's how to keep saving for retirement at the same time.

By Alessandra Malito

Young families are striving to do better but struggling with costs of living, including expensive childcare

Childcare can be expensive, and a barrier to other major financial goals like saving for retirement.

Many parents are in a conundrum: They need their jobs to pay the bills, but they also need trustworthy childcare; without the latter, they may not be able to work those jobs. Young families are struggling with the balance.

Add in the pressure of needing to pay or save for other major financial goals, such as retirement, and it might feel almost impossible. Parents across all income groups feel the stress of trying to do it all, said Dom Williams, a senior expert at McKinsey & Co. and a key author of a new McKinsey Institute for Economic Mobility report.

In fact, Americans of all ages, backgrounds and incomes are striving for a better life, but say rising costs of living are keeping them from their aspirations, the researchers found. The McKinsey report was based on a survey of more than 30,000 Americans in all 50 states.

Childcare, which has increased in cost dramatically in recent years, presents a particular burden. "As you have the capacity to spend towards childcare, then you are exposed to the cost of childcare," Williams said.

The trade-offs for many parents are to either continue to work and pay - sometimes thousands of dollars a month - for childcare, or leave the workforce to take on caregiving responsibilities. The alternative to outsourced childcare has a few invisible price tags, however; leaving a job not only cuts off a source of income for present-day expenses, but also the ability to save for the future.

The challenge of childcare

Childcare can easily eat away at a family's budget. The average weekly daycare cost is $332 and the average weekly nanny cost is $870, according to the Care.com 2026 Cost of Care report. That equates to more than $17,000 a year for daycare or more than $45,000 a year for a nanny. Childcare accounts for 20% or more of the average parent's annual income, and more than 3 in 10 (31%) parents are dipping into their savings to pay for it, the Care.com research found.

"Childcare and retirement savings don't have to compete if you automate the retirement piece first," said Jeff Judge, a certified financial planner and managing partner at Chesapeake Financial Planners. "The years you're paying for daycare are usually your highest-earning years too, which is exactly why quitting on retirement now costs more later."

Judge had a client last year where both spouses were working and they were paying more for daycare than their mortgage. They were going to stop 401(k) contributions altogether, he recalled, but instead he worked with them to cut down the contribution rate to the amount that captured the full employer match "and nothing more."

"Below that threshold, you're leaving free money on the table, and free money is the one thing a young family with childcare bills genuinely cannot afford to skip," Judge said. "Above it, during the daycare years, is optional. Automate the number that survives the childcare years."

Childcare is 'temporary'

One of the most important things parents can remember when they're stressed about paying for childcare while funding their other financial goals is that childcare, while expensive, is a temporary line item on the budget, financial advisers noted.

Jon Ulin, a certified financial planner and managing principal of Ulin & Co. Wealth Management, said he and his wife have experienced the puzzle of childcare - including using daycare, a part-time nanny, help from family members and flexible work schedules.

"It wasn't always easy, but we treated childcare as a temporary investment rather than a permanent expense," Ulin said. "The challenge is building a plan that gets you through those years without sacrificing your long-term financial future. Sometimes, the best financial decision is paying for childcare."

The alternative is having one parent leave the workforce, which would cause a disruption in his or her career, as well as halt savings with employer matches in retirement accounts or contributions to Social Security that are linked to future benefits.

"Too many families compare this month's daycare bill instead of the lifetime earnings they are protecting," Ulin said. "The answer usually isn't finding an extra $1,500 a month; it's making five or six decisions that each free up $200 to $300 a month. Families who successfully balance childcare and retirement rarely make one dramatic change. They make a series of temporary trade-offs until childcare is behind them."

Ulin suggests a few ways to free up extra cash in the budget until childcare is no longer necessary, including: shopping around for the best insurance rates; refinancing debt to have lower fixed bills; delaying lifestyle upgrades, like a new car or an expensive vacation; and splitting any raises between savings for childcare and the future before spending it elsewhere. There are also tax benefits to look out for, including the child- and dependent-care tax credit, or dependent-care FSAs that allow for childcare costs to be paid with pretax dollars.

See also: How parents can take advantage of the 'best summer-camp tax break in years'

What to plan for next

Treat the last day of childcare as a raise, advisers said.

When the last bill is paid, instead of taking it as extra cash to spend in the present, automate savings for retirement and other big financial goals. Avoid lifestyle creep, where seeing more money in the checking account is tied to the feeling of more freedom to spend.

"As children get older, enter public school or no longer need full-time care, don't let that extra cash quietly disappear into day-to-day spending," said Kate Feeney, a certified financial planner and vice president at Summit Place Financial Advisors. "Treat the reduction in childcare expenses like a raise you've already committed to your future. This is one of the most powerful ways to avoid lifestyle creep and can meaningfully improve your long-term financial security."

-Alessandra Malito

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08-08-26 1046ET