For Empty Nesters, Spending May Trump Extra Saving
By Anne Tergesen -- Wall Street Journal
When children leave the nest, many parents celebrate an end to the years of paying for braces, piano lessons and college tuition by splurging on themselves.
But a new study indicates that this spending spree can last for years, preventing many empty nesters from a much-needed ratcheting up of retirement saving.
“Households do not increase their savings very much even when the kids leave home,” says the study, released Wednesday by researchers at Boston College’s Center for Retirement Research.
On average, more than the eight years after the departure of the last child, empty nesters increase their savings in tax-deferred 401(k) retirement accounts by slightly less than one percentage point of income, the researchers found.
The same researchers calculate that 52% of working-age households are at risk of being unable to maintain their pre-retirement standard of living after they stop working. So the “findings support the view that the retirement-savings crisis is real,” the Boston College study says.
For empty nesters, the urge to splurge is understandable. According to the latest government figures, families with incomes of $106,540 or more spend an average of $20,000 to $25,000 a year on each child under the age of 18—not counting college costs. After years of such spending, many parents “feel like they have earned” the right to spend on themselves, says William Dix, a financial adviser in Raleigh, N.C.
Money may go for travel, a new car or house projects.
“There is often a long list of pent-up projects,” including updating kitchens and bathrooms and adding landscaping, says Carol Hoffman, a financial planner at Clear Perspectives Financial Planning in Blue Ash, Ohio. She says the average cost of her empty-nester clients’ home improvements is $35,000—and many roll from one such project to another.
Daniel Sheehan, a financial planner in Fresno, Calif., says that within two years of becoming an empty nester, he and his then wife blew through about half of his nest egg—by throwing parties, taking a Mediterranean cruise and buying a home theater.
At the same time, some empty nesters continue to spend on their adult children, such as by helping pay for graduate-school tuition and health and car insurance. Others take the opportunity to prepare for retirement by buying long-term-care insurance or paring debt.
The Boston College researchers say empty nesters’ saving rates rise by another two percent of income due to accelerated mortgage repayments, on average. But savings rates in taxable accounts don’t show any significant change over the eight-year span, on average, says study co-author Anthony Webb, a senior research economist at the Center for Retirement Research.
Experts say this may have dire consequences for a nation in which the median combined balance in 401(k)s and individual retirement accounts is $111,000 for households headed by those ages 55 to 64, according to the Federal Reserve Board of Governors’ Survey of Consumer Finances.
One takeaway for those still rearing children—and for their financial advisers—is to emphasize consistent saving for retirement rather than planning to catch up later. If that means saving less for college, so be it.
“One of the things we tell clients is you cannot take out loans or apply for scholarships to pay for retirement,” says Kyle Rudduck, an adviser at Truepoint Wealth Counsel LLC in Cincinnati, Ohio.
For empty nesters who are spending too much, meanwhile, financial advisers and academics offer several suggestions to help people change their spending habits and get back on track.
Think about why you are spending. “Becoming an empty nester is a significant transition in life” when strong emotions—from a sense of freedom to nostalgia for the past—can fuel a desire to spend, especially in combination with increases in free time and discretionary cash, says Eric Kies, a financial planner in Moline, Ill.
Other motivations can also be at work. Mr. Sheehan says he and his ex-wife spent heavily in an ultimately unsuccessful attempt to rekindle their romance.
“I was spending to make amends for a lot of the things I neglected as both a parent and a husband, in that I was always busy with business,” says the 70-year-old Mr. Sheehan, who is now remarried and has restarted his financial planning business after a five-year retirement, in part to rebuild his nest egg.
“I am a financial planner and yet, I didn’t follow my own advice,” he says. “I got caught up in emotions” and was “trying to buy happiness.”
Use technology to rein in spending. Online programs including Mint and Yodlee’s MoneyCenter can compile a budget for consumers based on their past spending patterns and alert them when they are in danger of exceeding specific thresholds. Using tools or having a written budget is valuable because “most people really don’t know what they spend. They just charge it,” says Ms. Hoffman.
Plan on smaller indulgences. On paper, it may make sense for someone who has fallen behind on his or her retirement savings to bank all the money previously allocated to child-related expenses. But in practice, such “austerity plans” rarely work, says Rick Kahler, president of Kahler Financial Group Inc. in Rapid City, S.D. “It’s just like with dieting,” he says. “If you cut out all the fat calories, you are setting yourself up for failure.”
Make saving automatic. Once you have decided how much more you need to save, ask your employer to automatically transfer the money from your paycheck to your 401(k). If you are already contributing the maximum to your workplace plan, set up automatic transfers from your bank account to a brokerage account or IRA.
“As long as the savings become automatic, you won’t have the moment where you have the ability to spend the money,” says Hal Hershfield, assistant professor at UCLA’s Anderson School of Management.
Dilip Soman, a professor of marketing at the University of Toronto’s Rotman School of Management, recommends setting up such automated transfers “months before you become an empty nester.” That way, the automated savings will kick in the month after the last tuition payment is made and “you won’t see a larger balance in your checking account than you normally see”—a sight that tends to trigger spending, he says.