Once the kids are away, the parents will play. It turns out that when the last of their children leave the nest, parents are spending substantial amounts of money, but not necessarily on preparing for retirement.
Many couples find they have more disposable income when they become empty nesters. According to the U.S. Department of Agriculture, the average cost of raising a child born in 1998 in the Northeast, for instance, is $22,263 annually for middle-income families, or a total of $400,734 over an 18-year span. Once that child is out of the house, a significant amount of income is freed up for other purposes, although many parents continue to help their children financially after college graduation by forking out money for graduate school tuition or health insurance or helping with living expenses.
When their children leave home, empty nesters are shelling out money on traveling and big-ticket items like a new car or major home renovations, according to a recent study from The Center for Retirement Research at Boston College. What they’re not doing, according to the study, is significantly ramping up their retirement savings.
Household contributions to 401(k) plans increase only 0.3 percent to 1 percent in the eight years after the last child moves away from home, according to the Boston College study. What’s more, the study found that more than half — 52 percent — of households that contain working-age individuals currently risk being unable to maintain their current standard of living once they retire. “Our findings support the view that the retirement-savings crisis is real,” the study says.
The Boston College researchers explain that how households spend their money once their nest is empty is critical to their retirement preparedness a little ways down the road. “If households consume less once their kids leave home, they have a more modest target to replace and they save more between the emptying of the nest and retirement,” the researchers write.
The study concluded that it’s imperative that those nearing retirement increase savings. “Assessments of the adequacy of retirement savings depend crucially on whether households cut consumption and increase spending when the kids leave home,” it says. However, with empty nesters suddenly more flush, with a greater percentage of disposable income than they’ve had in decades, saving for retirement often isn’t their financial priority — which is a huge mistake. “Saving little while the kids are at home and then continuing to save little after they have left puts households on track to enter retirement with insufficient resources to maintain their standard of living,” the study concludes.
“Savvy savers are always looking for ways to maximize their cash flow, so any change in life circumstances or monthly expenses represents an opportunity to recalibrate and push excess funds into savings or other investments,” Greg McBride, chief financial analyst and senior vice president of Bankrate.com, said in an article on the Ally Bank site.
Agents and brokers can do a great service to clients whose children are newly or nearly out of the house by helping them review both their current spending habits and their retirement goals, and get on — or stay on — the right retirement track. Annuities might be a good fit for many clients as their life changes and they have an opportunity to revisit and fine-tune their vision for their post-retirement future.
According to a Datamonitor study, age defines empty nesters’ spending patterns. Early empty nesters (ages 50 to 64) have high disposable incomes and spend lavishly on rewarding themselves. Late empty nesters (65 years and over) have more limited budgets, leading to a greater emphasis on value for money in their consumer packaged goods purchases, with high spending reserved for special occasions.
Fixed indexed annuities (FIAs) are a popular topic with clients who have reached 50 years of age, according to a fixed indexed annuity study sponsored by Athene. The vast majority of brokers who participated in the Athene study said that they discussed FIAs at least occasionally with clients ages 50 and older. More than two-thirds (78%) of agents and brokers have FIA-related conversations with clients in their 50s, and a full 82 percent said they broach the subject with clients in their 60s. The agents and brokers discuss FIAs most frequently with clients who have a total net worth between $100,000 and $1 million.