Why don’t savings increase after children leave the home and how does it affect your financial life?

“There are mysteries which men can only guess at, which age by age they may only solve only in part”

Bram Stoker

Researchers often encounter problems that, after enough unsolved time, become mysteries. One of them, is if children are so expensive, then how come savings for parents don’t increase when children leave the home?

Presumably, consumption would increase when children go off to college or leave the home and begin to live on their own, providing for themselves. It’s a theory that makes sense just by intuition, but savings, however, do not seem to increase. So the question is, why not?

Studies from Germany, Italy, (2011) and America (2016) found either that consumption either decreases very minimally or not at all. Some researchers tried to compare households without children to households with children over a long period of time to determine if consumption does decline, and it seems pretty conclusive that consumption does decline, but that it does not result in increased savings.

Children aren’t still consuming their parents’ money even after leaving the house either, as many of you readers might posit just from being parents. On the whole, parents’ gifting or providing for their children after they leave the house is minimal to not at all on the whole. The mystery continues…

Where’s the beef?

In that case, where is the money going? Money is either taxed or consumed, and if it was being taxed, that would have shown up in the data.

One other theory was that parents are, instead, turning their attention to long-term debt such as their mortgage or credit card debt and eliminating it by increasing their payments rather than saving it for their retirement.

Data from a study analyzing median mortgage payments for households with mortgages by years since kids become financially independent found that there is no substantial evidence to support this theory. It’s clear that parents aren’t taking the debt-based approach to their finances in response to their children leaving the home.

Bringing home the bacon

It appears, from a study from the Boston Center for Retirement Research, that average total household hours worked seems to decline from close to sixty hours per week on average to slightly under forty. Income declines by about $2,500 per year, and since median household pre-retirement income is roughly $61,900, that brings that number to about a 4% drop in money coming in.

While this phenomenon in behavior does not necessarily account for the entire difference between the fall in consumption, it’s at least a start into the insight in behavior over the course of a person’s financial life.

What’s the payoff?

As usual, financial planning involves taking this information and data and applying it in a practical way. When sitting down with couples and discussing their goals over the next 20 to 40 years, it’s good to create realistic expectations. If couples are expecting that their consumption will drastically decrease post college, then it’s good to set the expectation that that’s very unlikely to happen given the data. Savings shouldn’t be put on hold during someone’s financial life because they expect that they’ll have more money later on, unless that is specifically planned for and budgeted, and even then, it’s a much sounder strategy as we’ve noted in the past to save money earlier rather than later in your financial life.

Portfolio managers, too, can adjust portfolios in the understanding that there isn’t an 18-21 year period in which a child will enter a couple’s life, consume, and then go off on their own and therefore return consumption to its norm.

The caveat, of course, is that if consumption decreases and savings do increase for a certain couple. That, while unlikely, is still possible and it’s important to note that since that can only be a positive for person’s financial health, it’s not something that needs to be planned for as a random emergency might be.

In conclusion, finances are complicated, and we’re often left scratching our heads for why what would seem to be common sense simply isn’t the case. It’s important, however, to keep ourselves informed, our expectations realistic, and our financial plans reflective of those realities so that we can be adequately prepared for retirement.

Don’t forget to catch the Emergent team on Today y Mañana every Thursday at 10:15 am