Cutting Kids Off Can Boost Retirement

It may not be emotionally easy to do, but clients can notably improve their retirement outlook if they reconsider financial support given to their self-sufficient adult children.

When children grow up and move away from home, they tend to take a load off their parents’ shoulders in the form of reduced daily living expenses.

Less mouths to feed and fewer people to look after means “empty nesters” will be left with some extra cash after their kids fly off, argues a new analysis from the Center for Retirement Research (CRR) at Boston College, but are they making the most out these earnings?

According to CRR researchers, the short answer is “No.” Although a CRR study found that empty nesters do increase 401(k) contributions, these raises typically range from 0.3% to 0.7%, making them “extremely small” and unlikely to improve retirement readiness, depending on the data used to project expected contributions.

According to the CRR, “the increase, while statistically significant, is very small compared to that suggested by theory. For example, consider a household with two adults and two kids at home making $100,000 and contributing 6% of salary to a 401(k). The research studies that assume households follow an increased saving path would suggest that the couple move all the way to the 401(k) deferral limit of $18,000 in 2015, or 18% of earnings, for a 12-percentage-point increase. Yet the results showed, at most, only a 0.7-percentage-point increase.”

The study, related to this, found that many households are maintaining similar consumption levels after their kids move out, resulting in fewer resources at retirement and a living standard that will be difficult to maintain.

“Among the explanations offered for the lackluster increase in savings is empty nesters’ continued financial support of adult children,” says Carla Dearing, CEO of SUM180, an online financial planning service that focuses on women. “Picking up their grown kids’ expenses—student loans, insurance, auto payments, smart phone bills—is a generosity those who have not yet saved enough for retirement can ill-afford.”

NEXT: Reversing the Trend

Although it’s clearly problematic, telling parents to stop supporting their sons and daughters after the kids have become financially independent is not the easiest piece of advice to give, researchers admit. Dearing says it may be easier with the right approach. She uses the analogy of being on an airplane and being told to put your oxygen mask on first in case of an emergency.

“It’s in your children’s long-term interest that you be secure,” Dearing tells PLANADVISER. 

But even after cutting these expenses, the question moves on to whether participants will use that extra money wisely. Dearing stresses that employers and third-party administrators or advisers need to promote financial wellness programs that go far beyond basic education and instead tell people how much they need to save, “and what it could look like for their future.”

“What we’ve found is that people don’t want education,” says Dearing. “If they wanted a degree in finance, they would have gone out and gotten one. They want answers. They want solutions.”

OneAmerica, a financial services company based in Indianapolis, offers different tools to help investors visualize their retirement projections. One example is a “mock retirement” worksheet which individuals fill out to see what their income would be like in retirement if they start saving and cutting certain expenses, such as those going to support adult children.

“When people can see what it really means to them in black-and-white and on paper, it can make a very huge impact,” says Kara Clark, marketing director of retirement services at OneAmerica.

Clark explains that this is one way for parents to see where they can begin reducing or eliminating monetary support to their adult children. Digital tools can also be useful. Dearing points out that some research suggests plan participants either don’t want to talk about their money, or they would rather analyze their financial situations on their own before speaking to a financial adviser. She says online tools may assist people with examining their financial situations on their own.

To help people plan for retirement, OneAmerica offers a suite of videos, podcasts, tutorials and other personal finance tools for individuals. Sum180 offers an online interview and tools to generate individual plans.

NEXT: Updating Plan Design

Denise L. Preece, assistant vice president of field services, retirement services, at OneAmerica, stresses the importance of automatic enrollment and automatic deferral increases in plan design, as well as educating participants about catch-up contributions toward 401(k)s and Individual Retirement Accounts (IRAs), specifically Roth IRAs. 

“You need to have the right plan design in place in order for people at certain stages in life to take advantage of a few key things,” says Preece, noting that, in general, automatic and progressive plan design features are often met with enthusiasm and gratitude from plan participants, rather than pushback.

Dearing suggests that advisers also need to break through all the negative statistics about retirement savings.  She notes that most people approaching retirement are in their 50s and in their peak earning years giving them major opportunities to save more for retirement—especially after cutting expenses toward financially-independent children.

“One of the biggest messages for people in that age group [50 and older] is that it’s not too late,” Dearing says.

The CRR gathered its findings using tax data and the Health and Retirement Study. This annual panel survey of households aged 50 or older collects in-depth information on data such as income, pension eligibility and children’s statuses on housing and schooling.

The CRR research brief is available online here.