Retirement & Financial Planning Report

A study by the Center for Retirement Research has found several possible explanations for data showing that while parents spend less once their children leave home, neither their savings rates nor their net worth increase accordingly.

That issue “has important implications for our understanding of retirement income adequacy,” it says, since lower spending in theory at least leaves parents free to save more for their retirement. “A decline in consumption relative to income should result in more savings and greater net worth. However, household net worth to income ratios do not increase.”

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It examined what it called three possible 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.”

“If households are reducing consumption and paying down their mortgages, they are following the path envisioned in the optimal savings literature and may be more prepared for retirement than previously thought,” it said. However, it said, the data show that parents do not pay off their mortgage more quickly after becoming empty nesters.

Nor does continuing to provide financial support for the children even after they have left—or increasing spending for other family members such as aging parents—account for the difference, it said. But it found support for the third possibility, which it termed “parents opting for more leisure.”

“Parents reduce the number of hours worked by about one hour a week or adjust to a more flexible but lower paying job, resulting in lower annual earnings of about $2,000 – $2,500 a year, or about 3.3 percent of earnings,” it said.

“With income down and savings virtually unchanged, parents are reducing consumption after children leave and thus need less to maintain the same standard of living,” it said.

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