Geeking out: empty-nester spending and retirement

Last updated on: August 16, 2016 at 9:45 am by Jane the Actuary

Geeking out: empty-nester spending and retirement 2016-08-16T09:45:07-06:00 Jane the Actuary

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Whew — I haven’t spent much time on retirement and related issues lately, but I’m getting tired of all the social issues, especially from a Serenity Prayer perspective (that is, recognizing that any amount of blogging I do isn’t going to make a difference).

Andrew Biggs, of the American Enterprise Institute, writes in Fortune, among other spots, with the perspective that we don’t have a retirement savings crisis, just a few bobbles, and thus don’t need to throw ourselves into a panic about it, and his latest piece repeated the theme, with the particular angle this time that the replacement ratio needed for retirement income is lower than experts cite because, by and large, they’re used to the lower level of per-person spending that comes with raising a family. When the kids move out and no longer need support, a couple can spend less without feeling deprived. Hence, we can all stop panicking about seemingly-insufficient savings rates.

(Biggs’s preferred reform of the retirement system, by the way, is fairly similar to my own.)

Now, Falling Short, by the team at the Center for Retirement Research, claimed that, counter-intuitively, empty-nesters did not decrease their overall household spending when the kids left the house but rather ramped up their “per person” personal spending, so that, if it’s a public policy goal to enable Americans to keep their standard of living constant in retirement, we have to take into account this ramped-up standard of living. Whatever economizing happened during the child-rearing years, the idea goes, got thrown out the window as soon as that money formerly spent on feeding hungry teens, and, even more, on college tuition, is freed up for dinners out and nicer vacations — e.g., abandoning the family camping trips in favor of cruises.

So Biggs’s article today provided a link to the research that the Falling Short authors cited, “Children and Household Utility: Evidence From Kids Flying the Coop” by Norma B. Coe and Anthony Webb, and it is, remarkably, not behind a paywall. Surprisingly, the data is rather scanty. It’s based on a study of some 8,000 households, which sound great, but once they thinned the data out to only those households at early or regular retirement age who had children leave the nest during the duration of the study, from 2000 to 2008, they ended up with 36 households. The authors use regression analysis, against two control groups — those with no children in the home at any point during the study period, and those whose children didn’t move out — to conclude that couples keep their spending levels even after spending “needs” decrease.

Now, it’s been years since I’ve studied regression methods, so I’m not going to even try to work through the particulars here. And the study asks participants whether there are “resident children” but it’s not clear whether a college student, living elsewhere but still being supported by the Bank of Mom and Dad, was included as a “resident child.”

But what’s interesting is that Biggs also references another study, “Saving and Consumption When Children Move Out” by Alexander Klos and Simon Rottke (again, almost too good to be true, non-paywalled) which presents the opposite conclusion, that after a bit of a transition period (hypothesized to reflect inertia as well as support of adult children), households do indeed spend less.

Now, why do these two studies show different results?

Biggs observed (via a twitter exchange) the former study had too small a sample size and looked at the changes immediately after move out, rather than over a longer period of time. Which is true. The latter study also measured savings rates, and the former looked at consumption. But there’s another angle, too: the latter study was of German households, the former of American households. And while you’d think it’d be American households whose finances would be the most stretched by having kids, due to our Helicoptering way of life (e.g., parents who spend large sums of money on college tuition, vehicles for older kids, extracurriculars, etc. — expenses that are not relevant in Germany), financial patterns of behavior over time may simply be as different between the two countries as the household savings rates themselves — Germany’s rate is nearly double that of the U.S. — 9.7% vs. 4.0%.

But Biggs’ bottom line is this: retired Americans who are parents have saved less during the preretirement years than non-parents (this is apparently well-documented, and makes sense) but they don’t feel poorer during retirement, based on survey responses, even if they are, objectively, financially less well off.

In contrast, Falling Short says: “we’re concerned about the future, regardless of the well-being of current retirees.”

My bottom line:

Well, look, they’re both right — and wrong. It is true that you simply can’t take the well-being of today’s retirees and extrapolate, because there are major changes coming down the pike — especially with respect to the changing nature of large-employer-provided retirement benefits, which have so dramatically, and so quickly, moved from DB to DC, for future retirees (the current generation of retirees and even today’s near-retirees being insulated by grandfathering). But you also have to distinguish between your objectives, in talking about “retirement income needs,” as there are two different issues:

First, how do you advise people who want to know how much they need, and consequently, how much they should save?

and second, what’s needed in terms of public policy?

The very fact a couple can support a family on an income of X, whatever that X is, means that, in terms of a reasonable standard of living (as perceived by that couple), only a portion of X is needed. Frankly, the long-awaited cruises or golf vacations are great, but it’s hardly necessary for policymakers to worry too much about them. On the other hand, if that family felt that, during the childrearing years, they were just barely scraping by, and those children leaving the nest lifted a financial burden, then they’d hardly want to go back to that prior living standard. In terms of financial advice, the proliferation of modelers means that it’s easy enough to ask any given couple planning retirement about the living standard they want to target.

But, at the same time, this points to a certain futility, in terms of public policy, on focusing on retirement income replacement rates, and suggests that we really need to look at spending our efforts on (1) making sure the elderly aren’t living in poverty (that is, material deprivation, not lack of “income” as defined by statisticians) and (2) putting forth efforts to enable the middle class to achieve a standard of living which is perhaps not identical to their pre-retirement standard, but provides a basic “middle-classness.” Which, I’ll remind you, are the twin objectives of The Jane Plan.

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