What Happens When the Kids Leave Home?

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Headshot of Alicia H. Munnell

is a columnist for MarketWatch and director of the Center for Retirement Research at Boston College.

New study shows miniscule increase in 401(k) saving, suggesting retirement crisis is real.

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.  What they actually do is an open question. 

The answer to that question is important – much of the debate on whether or not we face a retirement savings crisis comes down to what parents do when the kids leave.  If they spend the money, they will arrive at retirement with fewer resources and a higher standard of living to maintain.  In contrast, if they save the money, they will have more resources for retirement and a lower standard of living to maintain. 

A recent study by the Center uses data from the Health and Retirement Study (HRS) linked to W-2 tax data to see what happens to 401(k) saving when the kids leave home.  The HRS is

a panel survey of households over age 50 that has been administered every two years since 1992.  The survey collects in-depth information on income, education, pension eligibility, and children’s residence and schooling.  The analysis focuses only on households that are married throughout the sample, so as to avoid changes in saving that may be due to family transitions.  The sample is further restricted to households where at least one member reported being eligible for a 401(k) plan at their employer.

The first step is to define what it means to have kids in the home.  We consider three definitions.  The first is having kids that physically live at home, regardless of age.  However, this first definition omits kids who have left the home but are residing at college.  Since the purpose is to identify financially dependent kids, our second definition includes kids who moved out of the household but are still in school.  This definition essentially assumes all children in college are financially dependent, even though some kids attending college may be financially independent.  We therefore consider a third definition in which kids in college are excluded if, at a prior interview, they were neither physically resident nor attending college, i.e., in the past they were likely to have been financially independent.  A separate analysis is conducted using the Survey of Income and Program Participation, which captures a broader age range of households than the HRS.  For this analysis, the main definition of kids leaving home uses a simple cut-off of age 23 and over.

Using these data and definitions, the next step is to compare households that still have resident children to households where the kids are gone.  This analysis uses a regression approach, where the dependent variable is the share of the household’s earnings contributed to a 401(k).   

The results show that households do increase their 401(k) saving when the kids leave by 0.3 to 0.7 percentage points, depending on the definition considered.  But that is not the end of the story.  The increase, while statistically significant, is very small compared to that suggested by theory, where a family of four earning $100,000 would increase their contributions by 12 percentage points.

The bottom line is that the size of the increase is more consistent with research that suggests roughly half of households do not have enough savings for retirement than with theoretical models suggesting that most are doing fine.  We should be very worried about the retirement security of future retirees.