Empty-Nesters Aren’t Saving Enough

Day care, sneakers, cell phones, maybe college – kids are expensive. When they grow up, empty-nesters face a decision about what to do with their extra money.

What they choose is crucial to their retirement security for two reasons – one obvious, and one subtle but very important.

The Center for Retirement Research estimates that about half of U.S. workers might not have enough savings to maintain their standard of living after they retire. So, the obvious thing to do after being freed from child-rearing obligations is to put more money into an employer retirement plan. But 401(k) saving increases only modestly after the kids leave home, according a study by the Center comparing empty-nesters with parents whose kids are still living at home.

The Center’s researchers confirmed this finding using two separate sources of data on married households’ finances. One was a University of Michigan survey of nearly 2,500 households in which the man was over age 50, with financially independent offspring defined as those who are no longer living at home and, if they are college students, have not attended school continuously. The other was U.S. Census data on more than 40,000 adult households of all ages, with independence defined simply as over age 23.

The researchers found that soon after the kids are gone, the increases in 401(k) savings, as a percentage of household incomes, range from 0.3 percentage points to 1.0 percentage points, depending on the survey and the definition of dependents used. In any case, the additional amounts are small relative to what most empty-nesters would need to prepare for retirement. The researchers also found no meaningful increase in saving through two other avenues: non-401(k) accounts and additional mortgage payments.

The flip side of saving is spending, which also affects retirement security in a subtle but important way. If empty nesters decide to continue spending the same amount they did when the kids were living at home, the smaller household of two is actually raising its standard of living. This increase sets the bar higher for how much income the couple will require to maintain that standard of living after they retire.

After the kids leave, it’s understandable that self-sacrificing parents might want to splurge a little on a trip, theater tickets, or an expensive hobby. But be sure to figure out how much to save and spend to adopt a sustainable standard of living for retirement.

The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.