Squared Away Blog

May 5, 2011

Whoopee! The Kids Are Gone

Many parents feel the tension between competing priorities: saving for their children’s college education and saving for their own retirement.  Once the kids graduate and move out, the parents rationalize, we’ll really start socking money away.

But do they?

They do not, according to a recent report from Boston College’s Center for Retirement Research, which is affiliated with Squared Away.  The report found that parents, suddenly feeling rich after the children leave the nest, indulge by spending 50 percent more on eating out, going to the movies, or buying new clothes.

There are two risks in doing so.  First, parents who spend more on themselves will never catch up on the retirement savings they had sacrificed each time they paid for new sneakers, a family vacation, or tuition.  Even worse, they are putting themselves on a path of higher spending that they won’t be able to sustain in retirement.

Many of the messages sent out by the financial literacy community focus on saving more for retirement.  The flip side of saving – spending less – gets much less attention as a retirement strategy.  But in these pre-retirement years, after the kids move out, controlling spending has a much larger impact on retirement security.

Consider this example from Steven Sass, the Financial Security Project’s program director. A couple 55 years old, with 10 years until retirement, reduces their spending by $1,000 a year and puts it in savings. At retirement, that nest egg will have grown to $12,808. Using the “4 percent rule,” the couple can safely withdraw about $512 a year for the rest of their lives, with little chance of outliving this nest egg. That improves their retirement prospects.

But the $1,000 reduction in spending also means they need that much less income to sustain their lifestyle in retirement. The benefit of reduced spending is nearly twice as significant as the additional savings.

Parents who want to adjust their spending cycles should think of their financial lives as “before and after children.”  Of course, life’s more complex.  Children don’t leave home all at once – they do it in stages, said Rick Miller, a Boston-area financial planner and consultant to the Center.  Following their freshman year, the kids come home in the summer, he said, but they may spend the next entire summer on an internship away from home.  After graduation, some get jobs and some come back home.

A new demand on parents is an emerging trend: A recent Wall Street Journal article, “Mom, Dad, Can I Borrow $140,000?” found that young adults are borrowing large sums from their parents, whose lending standards aren’t as tight as the bank’s.