Do Households Save More When the Kids Leave Home?

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. Answering this 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 extra 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. This brief, based on a recent paper, uses tax data to analyze how saving behavior in 401(k) plans changes for married couples when their children leave. The discussion is organized as follows. The first section provides more detail on why households’ response to the kids leaving is important. The second section describes the data and methodology. The third section summarizes the results. The final section concludes that households do increase their savings when the kids leave, but the increases are extremely small, suggesting that we do indeed face a retirement savings crisis.