How Do Children Affect the Need to Save for Retirement?

Children consume a substantial portion of a household’s income while living at home, but are usually financially independent by the time the parents reach retirement age. Relatively little attention has been paid to how children affect parents’ need to save for retirement. In this paper I use expenditure data from the Panel Study of Income Dynamics to construct life cycle expenditure patterns from households with children and childless households, comparing the two to gain insights on how children affect household consumption and how these differences may affect retirement planning strategies for parents versus childless adults. For households who had children, expenditures from ages 65 through 69 are 3 percent lower than from ages 45 to 49, while for childless households expenditures rise 33 percent from ages 45 to 49 through ages 65-69. Similarly, parental household expenditures at age 65-69 are equal to about 80 percent of earnings from ages 45-49, versus 94 percent for nonparental households. These life cycle expenditure patterns appear sufficiently distinct that both households planning for retirement and analysts evaluating the adequacy of household retirement saving should consider the presence of children in the household as a factor affecting the wealth necessary for retirees to maintain their pre-retirement standard of living in retirement.