How Do Households Adjust Their Earnings, Saving, and Consumption After Children Leave?

Abstract

Whether parents adjust their consumption after their children leave home has important implications for our understanding of retirement income adequacy.  Prior studies have found that parents reduce consumption after their children become independent, allowing them to save more for retirement.  Other studies, however, have found that savings for retirement does not increase.  If households are both consuming less but not saving more after the children leave, where are the resources going?  The project examines three ways to reconcile these seemingly inconsistent results: 1) parents may be saving by paying down debt faster, 2) parents may still be providing financial support to their grown children, and 3) parents may be adjusting their labor.

The paper found that:

• Households are not saving by paying down debt quicker after the children become independent.
• Parents also do not continue to provide more money to children after they leave.
• Parents are, however, reducing the number of hours worked and earn about $2,000 less per year after their children become independent.
• Consumption relative to income decreases by 6 percent after children leave but net worth remains unchanged, so the conflict remains.

 
The policy implications are:

• Savings and consumption are not the only levers that parents can adjust after children become independent, they can also adjust hours worked and earnings.
• The ability for parents to save while reducing their labor and earnings will, in part, depend on the stability of the jobs and whether they have benefits.