Earlier this week we learned that student loan debt is hindering the ability of many young Americans to save for retirement but the cost of higher education can adversely affect their parents’ old-age financial security as well. Indeed, the amount of money that can be set aside for retirement is reduced when a person must also help pay for a child’s college-related expenses. In fact, more than half of U.S. parents surveyed by T. Rowe Price last year said that they would rather dip into those savings than have their children rely solely on student loans. This sentiment may be partially due to parents' personal experiences with student loans because 40 percent of respondents who used student loans to pay for their own college education said that paying off that debt has significantly limited their ability to save for retirement.
Further, if college graduates are not able to find a job that pays well enough to meet their student loan and other immediate financial obligations, many parents will sometimes step in and help by covering the payments or even taking on some of the burden themselves, e.g. Direct PLUS loans. Such behavior became quite common during the “Great Recession” when recent graduates had to deal with a particularly challenging job market. In fact, a U.S. Government Accountability Office (GAO) study calculated that the total outstanding education loans held by Americans age 65 and older ballooned to $18.2 billion in 2013 (most recent data available), up significantly from $2.8 billion in 2005 before the recession hit. Most parents are likely already well aware that kids can be very expensive but what happens when children finally become financially independent? Do parents begin to focus more on their own financial well-being and increase their retirement saving?
Yes, but just slightly, according to a new study from Boston College’s Center for Retirement Research. Specifically, the researchers found that U.S. households examined over the sample period's multi-year time horizon tended to increase their 401(k) saving by 0.3 to 0.7 percentage points when kids moved out of the house. Although any boost to retirement saving is always welcome, that range is well below the increase that was theoretically possible and a potential explanation is that after kids leave, many parents will not save all of the money they used to spend on their children and instead spend the funds on themselves. Such behavior means that parents are not just failing to maximize their retirement saving but also increasing their standard of living through higher consumption. That is a problem because if these individuals want to maintain their new (more expensive) lifestyle in old age then their unchanged savings rate will be even less adequate than prior to when their kids moved out.
Sources: T. Rowe Price, GAO, Boston College (CRR)Post author: Charles Couch