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Diaper dilemma: Child care costs as much as a year of college

New parents grapple with daycare costs and long-term savings goals

Cash-strapped millennials now have another expense to juggle, in addition to saving for retirement and paying student loans: They're shelling out tens of thousands for someone to watch Junior.

Across the country, the average annual cost of child care is approaching parity with the cost of in-state tuition at some universities, according to data from Child Care Aware of America, an advocacy group.

To put things into perspective, a year of in-state tuition, room and board at the State University of New York at Albany adds up to $22,205.

In the Empire State, the annual cost of placing your infant and 4-year-old in a care center is $25,844, accounting for more than 12 percent of median income in the state, according to Child Care Aware.

Even in places with a lower cost of living, having someone look after your little ones is taking a large bite out of your income. See below for a chart.

"A lot of clients are entering the phase of their life where having a family is top of mind," said Douglas Boneparth, president of Bone Fide Wealth in New York. "Child care can be like a second rent payment."

It isn't impossible to do it all, financial planners say, but some tough choices must be made.

Striving for compromise

"It's worth exploring a middle ground where it's not all or nothing: that you either work full-time or you're at home full-time with your child," said Matt Becker, founder of Mom and Dad Money in Pensacola, Florida.

You can talk to your employer about working from home one or two days a week to help defray the cost of a full week of child care. Or you can partake in a nanny-share with another family to help split the cost of hiring a professional.

Jodie Griggs | Getty Images

Whether it makes sense for one parent to sit out the 9-to-5 grind to help reduce the cost of care will depend on whether he or she actually wants to do that — and whether a family can afford it.

Sitting out

If your net pay is in the neighborhood of what you'd pay your caregiver for looking after your child — and if you aren't the spouse providing the family's health insurance — it might be worth considering sitting out, said Boneparth.

For New York, he estimates that if one parent has a gross salary of about $65,000, it may make sense to have this conversation.

Here's the tradeoff: If you sit on the sidelines, you lower your lifetime earnings, reduce the amount you can save in your 401(k) plan and pause your contributions to Social Security.

The Center for American Progress estimates that a 26-year-old woman who is earning $30,253 and takes off five years to provide care is losing $467,000 over the course of her career — a 19 percent reduction in her lifetime earnings.

The partner who is still working can adjust his or her withholding at work to free up dollars that would otherwise be lost to higher income taxes. This can help bolster cash flow in the meantime, said Patrick Amey, a financial planner with KHC Wealth Management in Overland Park, Kansas.

Depending on your income tax bracket, you should also consider whether it makes sense to use a dependent care flexible spending account — if your employer makes one available — or the child and dependent care tax credit. You may not use the credit and the FSA to cover the same expenses.

You contribute up to $5,000 each year to a dependent care FSA on a pretax basis to help cover the cost of day care, preschool and other costs.

"For people in lower tax brackets, not using the FSA may be a smarter move," said Becker. "You'll get a bigger break from the tax credit."

Managing cash flow

Financial planners acknowledge that it can take as long as six months for parents to grasp how their cash flow looks after a baby is on the scene.

Regardless of whether you and your partner remain in the workforce, look at different areas where you can scrimp to handle child care costs.

One thing to consider is to make the minimum payment on your student loans rather than accelerating the repayment, said Boneparth.

Don't put off your retirement savings. Amey recommends contributing at least 10 percent of your own gross salary to your 401(k).

"You don't want to contribute less than the match because you're giving up free money," he said.

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