How Do Households Adjust Their Saving After Children Leave Home?

Whether parents adjust their savings and consumption after their children leave home has
important implications for our understanding of retirement adequacy. Life-cycle savings studies
suggest that people are saving optimally (Scholz and Seshadri 2006, 2008). On the other hand,
studies based on the assumption of steady consumption over the working years conclude that
many households will end up unprepared for retirement (Mitchell and Moore 1998; Munnell,
Orlova, and Webb 2013). Assumptions about how consumption changes after children leave
have an important effect on estimates of retirement preparedness. Munnell, Rutledge, and Webb
(2014) show that differences in the treatment of children explain about half of the difference in
the estimates of the percent of households with inadequate savings.
Several studies have tried to examine empirically which of these two theories better
describes household behavior once children leave but have not answered the question. Biggs
(2019), for example, found that parents decrease their consumption more than non-parent
households at older ages, suggesting that parents may be increasing their savings. At the same
time, Dushi et al. (2016), using W-2 tax data, found that parents did not increase their 401(k)
contributions after their children became financially independent. If households are both
consuming less but not saving more after their children leave, the question that arises is where
are the resources going?
One potential way to square the circle is recognizing that 401(k) accounts are not the only
way for households to save; parents could be saving by paying down their mortgage or other
forms of debt after their children leave home. Another possible explanation is that typical
measures of consumption do not capture all the ways that households expend their resources –
parents could continue to provide financial support for their children by helping with down
payments or paying off student loans. A broader definition of consumption that includes
financial transfers might suggest that parents are not reducing consumption after children leave.
Finally, parents may also opt for more leisure, and, as a result earn less after their children
become independent, which could produce a decline in consumption and no increase in saving.
Reconciling the seemingly conflicting findings will help shed light on whether household
are saving enough for retirement.