Retirement Savings Bump After Children Leave Is Minimal

A CRR Issue Brief says its study found parents' increase in retirement savings after children leave home is very small compared to that suggested by theory.

One would think that when children leave the home, parents would put much more into saving for retirement, but a study has found this is not the case.

A study by the Center for Retirement Research (CRR) at Boston College found households do increase their 401(k) saving when the children leave, but only by 0.3 to 0.7 percentage points, depending on the definition and dataset being considered.

The CRR’s Issue Brief about the study says this is very small compared to that suggested by theory. For example, considering a household with two adults and two children at home making $100,000 and contributing 6% of salary to a 401(k, 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% of earnings.  Yet the results showed, at most, only a 0.7-percentage-point increase.

The researchers conclude that households’ financial response to the children leaving has important implications for retirement preparedness.  “If households stand pat and maintain their total consumption when the kids leave, they will aim to keep that consumption level in retirement and will have less savings with which to do it.  If, instead, they increase saving, they will have more retirement assets and a lower level of consumption to maintain,” they write.

However, the researchers do concede that this finding is not the last word on the subject, as some parents may assist children financially even after they have left home.

The Issue Brief may be downloaded from here.