Do households increase their savings when the kids leave home?
Much of the disagreement as to whether households are adequately prepared for retirement reflects differences in assumptions regarding the extent to which consumption declines when the kids leave home. If consumption declines substantially when the kids leave home, as some life-cycle models of retirement saving assume, households need to achieve lower replacement rates in retirement and need to accumulate less wealth. Using data from the Health and Retirement Study (HRS) as well as the Survey of Income and Program Participation (SIPP), this paper investigates whether household consumption declines when kids leave the home and, if so, by how much. Because consumption data are noisy and savings is the flip side of consumption, this paper examines whether savings in 401(k) plans or total savings increase when the kids leave home.
This paper found that: Households increase contributions to 401(k) plans by 0.3 to 0.9 percentage points when the kids leave home. The finding holds across model specifications and for alternative definitions of the kids leaving home, but in some specifications is not statistically significant. The increase in 401(k) contributions, however is only a fraction of that predicted by life-cycle models that assume consumption declines substantially when the kids leave.
The policy implications of this paper are: The findings confirm that most households will not be able to maintain their preretirement standard of living. Retirement saving needs to increase.