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When Your Children Leave Home, Will You Save More for Retirement?

You may be asking yourself whether that’s a trick question. After all, almost one-third of 18- to 34-year-olds are still living at home with their parents. It is, in fact, the most common living arrangement for this age group and a circumstance that hasn’t occurred in more than 130 years, according to Pew Research Center.1

If your children are at home, you may be wondering whether they’ll move out before you retire. (If they don’t, perhaps you can charge rent to supplement your retirement income.) If your children do move out, will you begin to save more?

It’s an important question because many studies of retirement readiness assume Americans will save at higher rates after their children become financially independent. The Boston CollegeCenter for Retirement Research (BCCRR) examined this issue. Specifically, they analyzed data to determine whether retirement savings rates increased when parents became empty nesters.2

“Kids are expensive. As a result, when children become financially independent, parents often have a substantial amount of extra money on hand. In this case, they have two basic choices: spend more on themselves or increase their saving for retirement.”3

If they choose the former, then they may not be ready for retirement at full retirement age. After all, if parents spend any ‘extra’ money, they are raising their standard of living without increasing the resources available to support that standard in retirement.3Many parents don’t save significantly more in 401(k) plans

BCCRR looked at the Health and Retirement Study, a panel survey of households with members who are age 50 or older. The survey has been conducted every year since 1992. The goal was to determine what happens to 401(k) plan savings after children move out. They found savings did increase by 0.3 percent to 0.7 percent, depending on the data used to define whether children were independent:3

“…For example, consider a household with two adults and two kids at home making $100,000 and contributing 6 percent of salary to a 401(k). The research studies that assume households follow an ‘increase-saving’ path would suggest that the couple move all the way to the 401(k) deferral limit of $18,000 in 2015 or 18 percent of earnings, a 12-percentage-point increase. Yet the results showed, at most, only a 0.7-percentage-point increase…”

While parents may find they have extra money on hand when children become financially independent, researchers found no evidence to support the idea parents were inspired to save significantly more for retirement.2The nest is finally empty…what now?

Gas, electric, water, gasoline, insurance, groceries – it may be hard to fathom the savings that arrive on your doorstep when children depart. Readers of The Wall Street Journal offered opinions about what empty nesters should do with their “found” money:4

“Some people expressed regret at not having spent more when they were in good health. Others argued that there’s no way around the math – and it’s irresponsible not to save when you can. Still others provided tips on ways to have your cake and eat it too – by splurging at a low cost.”

Clearly, the savings strategy that suits one person may not be right for another. An individual who is close to meeting his or her retirement goal, and has a high probability of having enough savings to live comfortably throughout retirement, may decide to splurge. An individual or couple at the other end of the spectrum – with too little set aside for retirement – may make an entirely different choice and dramatically increase savings.

Unfortunately, relatively few Americans have ever figured out how well they are prepared for retirement. The 2016 Retirement Confidence Survey by the Employee Benefit Research Institute and Greenwald & Associates reported just 48 percent of participants had ever tried to calculate how much money they need to save to live comfortably in retirement.5

As a result, many parents may not know how well prepared they are for retirement, even if they’ve been saving for years. Those who haven’t taken time to evaluate their retirement readiness may want to take a few minutes to contact their financial advisor, or use an online calculator, to determine the state of their retirement preparations.

Folks who are not as well prepared as they would like to be, may have to make some tough decisions. Their choices may include choosing to save more, retiring later, investing differently, and living on less in retirement. Before making any changes, it’s a good idea to talk with a financial professional who understands both sides of the retirement equation – accumulating wealth before retirement and dispersing savings as income during retirement.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

There are hypothetical examples provided and they are not representative of any specific investment or scenario. This is not intended to be a substitute for specific individualized tax advice. We suggest you discuss your specific tax issues with a qualified tax advisor.


1 http://www.pewsocialtrends.org/2016/05/24/for-first-time-in-modern-era-living-with-parents-edges-out-other-living-arrangements-for-18-to-34-year-olds/
2 http://crr.bc.edu/wp-content/uploads/2010/11/wp_2010-16-508.pdf
3 http://crr.bc.edu/wp-content/uploads/2016/05/IB_16-8.pdf
4 http://www.wsj.com/articles/empty-nester-spending-readers-weigh-in-1444146676 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/Peak+Documents/WSJ-Empty-Nester_Spending-Readers_Weigh_In4.pdf)
5 https://www.ebri.org/pdf/surveys/rcs/2016/RCS_16.FS-3_Preps.pdf

This material was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named adviser.