We love our children, but they can be expensive. But once they, and the costs of supporting them, leave the nest, do households save or spend the difference?
Most retirement planning assumes the need to replace a certain percentage of pre-retirement income, and acknowledges that all the expenses that occur pre-retirement don’t persist, or don’t persist in the same amounts, post-retirement.
A new report from the Center for Retirement Research at Boston College uses the Health and Retirement Study (HRS), a panel survey of households over age 50 that has been administered every 2 years since 1992. They linked that data to 1099 W-2 tax data to get an accurate measure of households’ 401(k) saving and, focusing only on households that are married throughout the sample to avoid changes in saving that may be due to family transitions, as well as restricting the analysis to households where at least one member reported being eligible for a 401(k) plan at their employer, considered the impact on spending and saving.
The report finds that households do, in fact, increase their 401(k) saving when the kids leave home — but by a mere 0.3 to 0.7 percentage points, depending on the definition and dataset being considered.
Readiness ‘Read’
Not content to simply evaluate the results, the researchers here lay out two scenarios of retirement readiness based on two perspectives on retirement. The first basically assumes not only that many will not have enough income in retirement, but basically are living at or beyond their means. The net effect is that households need to have enough income at retirement to maintain a consumption level similar to the level they had when the kids were at home. As consumption remains constant in this scenario, the departure of the kids does not trigger increased saving.
The second scenario is more optimistic about retirement readiness. In these models, according to CRR, households have four basic modes of consumption:
- relatively low consumption before the kids are born;
- high consumption when the kids are at home;
- low consumption before retirement when the kids are gone; and
- low and declining consumption in retirement, reflecting the lower probability the household is alive at older ages. As a result, after the kids leave, parents save the money they used to spend on their children rather than spending more on themselves. These parents would, thus, arrive at retirement with both more savings and a lower level of consumption to maintain.
So what does the increase in retirement savings suggest? Well, according to the CRR researchers, that increase, though statistically significant, is very small compared to that suggested by the second theory. They suggest that a household with two adults and two kids at home making $100,000 and contributing 6% of pay to their 401(k) might be assumed (according to other research on the subject) to shift all the way to the 401(k) deferral limit of $18,000 in 2015 or 18% of earnings, an increase of 12 percentage points. Yet the results showed, at most, an increase of only 0.7 percentage points.
The bottom line? Though the CRR researchers acknowledge that their findings are “not the last word on the subject” — say because parents continue to assist children financially even after they have left home — they say the findings suggest that we should be concerned about households’ preparedness for retirement.
