Do Households Increase Their Savings When the Kids Leave Home?

24 Pages Posted: 18 Mar 2016

See all articles by Alicia H. Munnell

Alicia H. Munnell

Boston College - Center for Retirement Research

Irena Dushi

U.S. Social Security Administration

Geoffrey Sanzenbacher

Boston College Economics Department

Anthony Webb

Boston College - Center for Retirement Research

Multiple version iconThere are 2 versions of this paper

Date Written: August 01, 2015

Abstract

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.

Suggested Citation

Munnell, Alicia and Dushi, Irena and Sanzenbacher, Geoffrey and Webb, Anthony, Do Households Increase Their Savings When the Kids Leave Home? (August 01, 2015). Netspar Discussion Paper No. 08/2015-084. Available at SSRN: https://ssrn.com/abstract=2749553 or http://dx.doi.org/10.2139/ssrn.2749553

Alicia Munnell

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States
617-552-1762 (Phone)

Irena Dushi

U.S. Social Security Administration ( email )

Washington, DC 20254
United States

Geoffrey Sanzenbacher

Boston College Economics Department ( email )

United States

Anthony Webb (Contact Author)

Boston College - Center for Retirement Research ( email )

Fulton Hall 550
Chestnut Hill, MA 02467
United States

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